“Mall Is Still Not Dead” as Foot Locker Earnings Send Share Price Up +20%

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On Friday May 25, Foot Locker (FL) reported same sales stores declined just -2.8% YoY (analysts expected -3.6%) in Q1 ‘18, sending shares of the stock rising by +20% (to $55.81). Foot Locker buys 65-70% of the product it carries from Nike, so the brand continues to drive the brick and mortar retailer’s sales (+1.2% to $2.03 billion); but sales of Fila, Vans and Champion sneakers/apparel also contributed meaningful revenue to the company’s bottom line (-8.3% YoY, $165 million). While Nike and Adidas are increasing DTC sales, Foot Locker has managed to offset the reduced sales volume by increasing sales of higher priced products. CNBC’s Jim Cramer was so encouraged by the company’s quarterly results that he proclaimed the “mall is still not dead.”

Howie Long-Short: Friday’s report and resulting pop was welcomed news for shareholders fearful of a pending Amazon takeover (as a sneaker/apparel e-tailer) and Nike/Adidas cutting off access to premium products. Of course, FL is hardly out of the woods on the second front; the company acknowledged that while tighter distribution has coincided with an increase in full price sales, the reduced allocations will “continue to be a top line headwind over the next few quarters.”

As for Cramer’s comment, why does FL have plans to close 110 under-productive stores in 2018 – after closing 147 locations in 2017 – if establishing residency in a mall still made sense? FL said back in March that it was working to reduce its exposure to “deteriorating malls”, instead focusing on opening up 40 more “select, high-profile” stores (the company opened 94 in ’17). If/when malls figure out how they’re going to replace anchor tenants like Sears and J.C. Penney, I’ll buy Cramer’s story; until then, I’ll maintain mall owners should consider repurposing their properties as data centers, schools or micro apartment complexes.

Fan Marino: Hibbett Sports (HIBB) released its first Q1 ’18 earnings report on Friday 5.25 too, but investors weren’t nearly as pleased with the results. Analysts had expected the company to report a same store sales increase of +1.2% YoY, but the company reported a -.03% YoY decline. Shares dropped -15.6% by Friday’s close, but rebounded +6.5% on Tuesday (to $26.00).

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Fanatics to Take on Nike, Adidas, Under Armour

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Aston Villa Football Club (AVFC) has announced that Fanatics, Inc. will replace Under Armour as the exclusive licensing rights holder for all club merchandise, in time for the 2018-2019 season; but, unlike traditional sports merchandising deals, the company logo will not adorn team gear. Instead, the online retailer of licensed sports apparel will negotiate separate pacts for various pieces of merchandise (think: match-day kit, practice gear, fan apparel) with multiple 3rd parties. The rising value of kit sponsorship deals for the world’s most prominent clubs and the resources required to turn a profit on those partnerships, have left second-tier clubs like Villa with little marketing attention, less merchandise to sell and inevitably depressed revenues; opening the door for a new entrant. With the deal, Villa becomes the first English club to adopt the manufacturing model used in North American sports; Fanatics will manage everything from production to point of sale (including the Villa Park store and e-commerce platforms).

Howie Long-Short: This deal is sensible from the Fanatics perspective because it requires minimal capital expenditure to enter the potentially lucrative English football market. Villa’s status as a second-tier club meant that Fanatics faced little competition for the rights; and the company already maintains production and warehousing facilities in the U.K., properties acquired in their $225 million acquisition of Majestic Athletic. It remains to be seen if the club can increase merchandise sales without a major sportswear label’s logo on their products (hint: they will be), but if successful, sponsorship rights will continue to rise as the traditional players (NKE, ADDYY) look to retain control over the apparel space. Much like cable television providers and sports broadcast rights, the current establishment can’t afford to lose their association with sports teams/leagues and still manage to hit their growth targets.

There are several ways to play Fanatics, as Bank of America (BAC), Alibaba Group Holdings (BABA) and Softbank (SFTBY) are all stakeholders. In September, Softbank invested $1 billion in to the company; bring its total valuation to $4.5 billion (or +/- 2x revenue). For comparison purposes, retailers Dick’s Sporting Goods (DKS) and Hibbett Sports, Inc. (HIBB) currently have market caps ($3.33 billion, $494 million); roughly half of what they generated in 2017 sales ($7.92 billion$973 million). Of course, Fanatics is far better positioned for long-term success, maintaining (among other advantages, like a DTC model) exclusive long-term licensing agreements with all the major U.S. sports leagues through at least 2030.

Fan Marino: The team’s match-day kit is going to be designed by Luke 1977, a Birmingham based (where the team plays) premium menswear brand. The company’s logo will replace Unibet on the new design. For what it’s worth, Luke 1977 was named the ’10 Young Fashion Brand of the Year, beating out Diesel, Fred Perry and Firetrap in the process.

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NFL Merchandise Sales +40 YOY, Remains Biggest, Fastest Growing League

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NFL TV ratings were down another 10% for the 2017 season, indicating the league may not be as popular as it once was; but, Fanatics sales figures tell another story. The company reported that NFL fans spent 40% more on team apparel (jerseys, shirts, jackets etc.) YTD, then they did in Q1 ‘17. CEO Doug Mack also put to rest any talk that the NFL is losing popularity. Despite being Fanatics’ biggest league partner in terms of merchandise sales, it’s the company’s fastest growing league partner (YOY).

Howie Long-Short: The NFL acquired 3% of Fanatics in May 2017 for $95 million, at a $3.17 billion valuation; which was more than 2x revenue at the time. Noteworthy, as retailers Dick’s Sporting Goods (DKS) and Hibbett Sports, Inc. (HIBB) currently have market caps ($3.68 billion, $444 million) worth roughly half of what they generated in 2017 sales ($7.92 billion$973 million). That’s of no concern to NFL owners though, one was quoted as saying he could see Fanatics growing “anywhere from 8-10x”.

Fan Marino: NFL draft season is upon us (draft is April 26-28). It’s a particularly heavy QB class, with 6 players (Darnold, Rosen, Allen, Mayfield, Rudolph, Jackson) having the chance to be selected on Day 1. The NYJ, looking for a QB since ’69, gave up 3 2nd round selections (to Indianapolis) for the right to move from the 6th spot to the 3rd spot. One would think that would guarantee the team a QB, but ProFootballTalk isn’t so sure; Mike Florio believes Saquon Barkley (RB, Penn State) is the guy the team is targeting. As a Jets fan, I know where this is going (WATCH).

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Fanatics Announces American Express Jersey Assurance Program, Protects Fans from Free- Agency, Trades

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Fanatics announced the launch of the American Express (AXP) jersey Assurance program; enabling NBA fans who purchase a player jersey with an American Express card, within the Fanatics network (including Fanatics.com, NBAStore.com), to exchange said jersey if the player leaves the team (due to free agency or a trade) within 12 months of purchase. AXP has taken the initiative to back both Fanatics existing program (90 days) and to extend the protection (for those who purchase with an AMEX), offering fans the confidence required to spend $250 for a new authentic Nike (NKE) jersey; knowing unforeseen changes could occur at any time before, during or after the season. Should a player relocate (and over 100 are free agents in ’18), fans will have the option to trade their existing jersey for a model on their new team or another player on the existing team.

Howie Long-Short: The NFL bought 3% of Fanatics in May 2017 for $95 million, at a $3.17 billion valuation; which was more than 2x its revenue at the time. Noteworthy, as retailers Dick’s Sporting Goods (DKS) and Hibbett Sports, Inc. (HIBB) currently have market caps ($3.72 billion, $498 million) worth roughly half of what they generated in 2017 sales ($7.92 billion, $973 million). That’s of no concern to NFL owners though, one was quoted as saying he could see the Fanatics growing “anywhere from 8-10x”.

Fan Marino: If you’re requiring usage of a jersey assurance program, you’re doing it wrong; you must take the player’s potential longevity with the team in to consideration. Look for guys that will retire with the franchise or a rookie with star potential, not a journeyman! From October-December, the league’s Top 10 most popular jerseys were; Curry, James, Durant, Antetokounmpo, Porizingis, Embiid, Westbrook, Simmons, Leonard and Harden. Only those with a recently purchased James jersey (and maybe Leonard) need to worry about holding on to their receipts. I do need to point out though, that during the ’16-’17 season, 5 players with Top 8 most popular jerseys were traded or free agents (Irving, Wade, Butler, Rose and Anthony).

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Analyst Predicts 30% Decline for Under Armour, “No Fundamental Recovery in Sight”

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Susquehanna Financial Group Analyst Sam Poser has urged investors to sell Under Armour (UAA), predicting the share price will drop 30% in 2018; gains the company realized over the last 2 months. Poser believes the company’s decision to advertise with low-end retailers (i.e. KSS, DSW) is having an adverse effect on its efforts to sell product to “better retailers” (i.e. DKS, HIBB); insisting “there is no fundamental recovery in sight.” Stifel Analyst Jim Duffy has a contrary opinion, he’s pleased with the company’s recent cost savings initiatives and improved performance and foresees growth opportunities both internationally and within their footwear division.

Howie Long-Short: Following release of Poser’s note on Monday morning, shares declined 5.5%; closing at $15.11, the lowest the stock has been priced at since Summer ’13. Need a reason to believe UAA can turn it around? In June ’17, the company hired Patrik Frisk (former ALDO Group CEO) as President and COO. The 30-year industry veteran is considered an expert in preparing companies for a sale.

Fan Marino: Sloane Stephens, Under Armour’s long-time top female tennis endorser, has parted ways with the company and signed with Nike (NKE). Stephens, who signed with the brand as a teenager in 2010, won the 2017 U.S. Open wearing UAA tennis apparel. Financial terms of the deal were not disclosed.

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Amazon Takes on The Sports World; 25 Companies That Will Be Affected

Amazon has been credited with killing everything from book stores to electronics retailers since its 1994 launch. Now, with a market cap +/- $570 billion and $16 billion in annual operating cash flow, the company is taking aim at the sports world. In our final newsletter of 2017, we look at 4 of AMZN’s recent initiatives and the 25 companies most likely to be affected in 2018.

Amazon Expands Brand Registry Program, Now Includes Nike

In June, Nike (NKE) agreed to join Amazon’s brand registry program; seeking to curb counterfeiting and non-licensed selling within the e-commerce marketplace. The partnership also supports the athletic apparel and sneaker brand’s initiative to boost revenue through a shift to digital and DTC sales, relying less on struggling retailers. Competitors Adidas (ADDYY) and Under Armour (UAA) already have direct-sales deals in place with AMZN.

Names to Watch: FINL, DKS, FL, HIBB, BGFV; LON: SPD, LON: JD

Howie Long-Short: Athletic apparel and sneaker retailers count on NKE (70% of FL business comes from NKE); but NKE launched its “Consumer Direct Offense” strategy in fiscal Q1 ’18, increasing e-commerce business 19% YOY. Mediocre retailers beware, the company is maintaining just a few dozen wholesale relationships as it looks to increase its e-commerce business (from 15% of revenue to 30% over the next 5 years).

Amazon Entering Private-Label Sportswear Business

In October, Amazon (AMZN) announced it was entering the private-label sportswear business and working with the same Taiwanese suppliers, Makalot Industrial Co. (TPE: 1477) and Eclat Textile Co. (TPE: 1476), that some of the world’s biggest athletic brands use. Elcat’s involvement is particularly noteworthy as the company manufactures high-performance sportswear for Nike (NKE), Lululemon Athletica (LULU) and Under Armour (UAA).

Names to Watch: NKE, UAA, ADDYY, LULU; TPE: 1476, TPE: 1477

Howie Long-ShortAMZN wants to be in the private-label clothing business because it pushes retailers to sell inventory on the e-commerce site. Should a retailer choose not to, AMZN will simply produce the item themselves and compete directly against the brand.

The Pursuit of Exclusive Broadcast Rights

In September, the company hired Brian Potter to lead its sports video business. In November, Jim DeLorenzo, head of sports, Amazon Video, said the company was pleased with viewership numbers, engagement and the reliability/quality of the cloud-based streaming service during its season long experiment streaming Thursday Night Football (10 games, $50 million); though it is too early to say if the company will pursue future exclusive sports broadcasting rights. The company has since done deals that will deliver Prime subscribers 37 ATP tour events (previously owned by SKYAY), the AVP Beach Volleyball tour each of the next 3 summers and docu-series on Michigan Football.

Names to Watch: CBS, DIS, FOXA, CMCSA, FB, GOOGL, NFLX, AAPL, SKYAY

Howie Long-Short: NFL Senior VP, Digital Media, Vishal Shah recently said “we continue to think some of the best days are ahead [for traditional TV partners] despite some shifts in the media landscape.” That doesn’t sound like linear television will be excluded in the next round of negotiations, but the NFL is encouraging interested media companies to bid on both television and streaming rights for the leagues TNF package; leaving the door ajar for the tech giants to receive exclusivity for the first time.

Twitch: The Future of Game Broadcasts?

Twitch, the live-streaming platform most often associated with video games, has agreed to stream up to 6 live G-League (Gatorade sponsored NBA minor league) games. Broadcasts will include interactive overlays (viewers can click a team name/logo for player, team, game and season stats), a loyalty program to reward viewer engagement during broadcasts (i.e. custom emotes for group chat) and the ability for users to provide their own live commentary (over the game feed) via the Twitch co-streaming feature.

Names to Watch: CBS, DIS, FOXA, CMCSA, TWX, RCI, MSGN

Fan Marino: NBA Commissioner Adam Silver has gone on record stating he’d like to see changes in the way sports broadcasts are presented; pointing out the lack of live stats and chatter surrounding the broadcast, that gamers have become accustomed to. I’m not ready to give up Mike Breen, Marv Albert and Ian Eagle for Towelliee; but it’s worth watching to see if anyone else is.

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HIBB SHARES DROP 30% AFTER ISSUING PROFIT WARNING; CAUSE $2.5 BILLION LOSS IN SPORTING GOODS SECTOR

Hibbett Sports (HIBB), a regional sporting goods chain, issued a profit warning that its 100+ stores will report a 10% drop in same store sales, for the Q2 ’17. The news sent HIBB shares tumbling 30% and caused the prices of several other sporting goods and sneaker retailers (FL, FINL, DKS, NKE, UAA) to plummet along with it, to a total shareholder loss of $2.5 Billion. The chain has recently launched, albeit a bit late, a new e-commerce platform that will integrate with its stores, in an attempt to stop the trend.

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Shares of this sports retailer are crashing, dragging Foot Locker, Nike down with it

Howie Long-Short opines: It seems buying footwear online is becoming more and more accepted by consumers. And Hibbett (52% of sales from footwear) just realized they should, probably, have a website? Uh oh.

Fan Marino says: HIBB shareholders have to wonder what the marketing department has been up to since 2005.