“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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“Nike Effect” Working, Shares Sit Just Below All-Time High

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Nike’s (NKE) transformation from wholesaler to mobile-first DTC retailers has been successful (+16% YoY in ’17 vs. overall corporate growth +6% YoY) and the company’s market cap ($118.84 billion) continues to rise as a result, despite recent C-level turnover. Dubbed the “Nike Effect” by CEO Mark Parker, the revamped strategy has NKE focusing on just 40 retailers while prioritizing its direct to consumer sales channels (think: storefronts, nike.com, Nike app, SNKRs app). Nike uses the data collected from its 100 million “members” to create a more personalized/rewarding shopping experience on those channels and to identify underserved demographic groups (think: females). Wedbush analyst Cristopher Svezia recently wrote that he expects Nike’s DTC sales to “push overall sales into positive territory in fiscal 2019.”

Howie Long-Short: Nike decision to control the means of distribution has helped the company alter its image with “sneakerheads”, which soured when the company began to overproduce its most desirable lines (i.e. Jordan). The lack of buzz surrounding the brand contributed to the loss of market share it experienced in 2017 (-1.6% to 32.9%). While limited edition drops make up a small portion of Nike sales (+/- 5%), the enthusiasm generated by the company’s most engaged consumers helps the perception of the brand and leads to mainstream consumer sales.

The “Nike Effect” has been validated by a “significant reversal of trend in North America”, growth in DTC sales and improved international sales (+24% YOY in China, +19% in Middle East and Africa) as the company beat analyst expectations (revenue + 7% to $8.98 billion) in fiscal Q3 ‘18.Shares closed at $71.31 on Tuesday, just below their all-time $72.19.

Unfortunately, Nike’s old brick and mortar partners (think: FL, FINL) have struggled to replace the revenue Nike product generated. FINL reported same store sales declined -7.9% in Q4 ’17, while FL reported same store sales were down -3.7% during that same period. FL will report Q1 ’18 financials on Friday 5.25.

Fan Marino: Limited edition Nike sneakers (including Jordans) are distributed through Nike’s SNKRs app (separate from NIKE app), a digital platform that gamifies (including a virtual queue) the shopping experience for company’s most wanted products. On June 23rd, SNKRs will have one of this summer’s most highly anticipated sneaker drops, the Travis Scott “Cactus Jack” Air Jordan 4. While the shoes will retail for $225, the current asking price on GOAT is $2,015; so, unless you have a lot of cash to burn, make sure to download the app, have your credit card information stored and be ready for the alert at 10a on 6.23.

Fun Fact: Prior to being acquired by NKE (in ’16) and rebranded as SNKRs, the community building and shopping app was named “Virgin Mega” and backed by Richard Branson’s Virgin Group. Financial terms of that deal were not disclosed.

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Puma Re-Entering Basketball Business After 17-Year Hiatus

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Puma (PMMAF) has announced that after a 17-year hiatus, it will be re-entering the basketball business. The brand, which generates the bulk of its sales from soccer and running related products in Europe, sees “substantial upside” to building a basketball vertical within the U.S. PMMAF will also aggressively target Greater China (known for its appreciation of the sport), expecting the region to become its most lucrative market by ’22. The marketing strategy will focus on the “culture around the game”, using “culturally relevant” athletes and entertainers (as they’ve done successfully with Rihanna) to market the new product line. It must be noted that despite Puma and ADDYY’s optimism, the U.S. basketball sneaker business remains “challenged”; Foot Locker (FL) reported Q4 ‘17 comparable store sales down “high single digits” YOY for the category.

Howie Long-Short: Puma (PMMAF) wants to increase profitability, so entering a Chinese market that generates the highest profit margins in the world on sporting goods is logical. The stated goal is to lift operating profit from 5.6% in ’17 to 10% by ’22, reasonable when you consider Adidas (ADDYY) and Nike (NKE) reported profit margins of 9.8% and 13.8% respectively in 2017 (ADDYY also just raised its target to 11.5% by ’20). The announcement was made at a capital markets day where the company also announced it expects currency-adjusted consolidated net sales to grow 10% annually until 2022, plans to increase DTC sales from 23% of sales to 30% of sales (over the medium term) and a proposed dividend of 25%-35% of consolidated net earnings to begin in ’19; resulting in share prices closing +5.73% (to $504.87) on Wednesday. It should be noted that back in January, Puma’s parent company Kering S.A. (PPRUY) announced it would be spinning off the brand to focus on its high-margin luxury businesses; shares are up 32% since.

Fan Marino: The game of basketball has changed since Puma last occupied the space, most dramatically as it relates to volume 3-point shooting (see: Steph Curry, Trey Young). USA Basketball is doing what it can to prevent the next generation of basketball stars from standing on (or 5 feet behind) the 3-point line. New rules eliminate 3-point FGs for players under the age of 11, to promote shooting from a “developmentally appropriate distance”; and provide for smaller basketballs and lower baskets for younger kids. The implementation of a shot clock for grades 9-12, was the most controversial rule change enacted.

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Retail Apocalypse Hits Foot Locker, Again

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Foot Locker, among 23 companies experiencing a “retail apocalypse”, announced on Friday that it would be closing an additional 110 under-productive stores in 2018; after closing 147 locations in 2017. Mall-centric retailers are struggling as consumer traffic has declined in favor of an e-commerce sales experience. FL is said to be working to reduce its exposure to “deteriorating malls”, instead focusing on opening up 40 “select, high-profile” stores (company opened 94 in ’17).

Howie Long-Short: Foot Locker posted disappointing Q4 ’17 financials (same store sales declined 3.7%), reporting a net loss of $49 million. Sluggish sneaker/apparel sales were blamed for the steeper than expected decline. The Q4 results combined with projections anticipating ’18 sales to be “flat to up low single digits”, sent shares tumbling 12.69% (to $40.04) at Friday’s close. It wasn’t all bad news though, Q4 2017 sales did increase 5% YOY (to $2.2 billion) and the company foresees an H2 ’18 recovery on the horizon. It’s worth noting that FL invested $15 million into Carbon 38, a luxury women’s active apparel company, during Q4 ’17.

Fan Marino: While declining athletic footwear (not a single performance sneaker placed in the Top 10 for ’17 footwear sales) and apparel sales are hurting FL’s business, athleisure as a trend remains popular; continuing to outpace dress and casual. That’s good news for me (I’m a big joggers and t-shirt guy), but better news for Sweat Tailor; a privately-held company that has managed to combine the comfort of sweatpants with the fit/style of jeans/dress pants. You need to check out their 5 pocket pants; they’re a game-changer. Oh, and if you use the code “JWS-ST” you’ll get 25% off. This is NOT a paid advertisement. I’m just looking to introduce a great product.

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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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Foot Locker Shares Experience Largest Single-Day Percentage Gain in Company History

Foot Locker (FL) shares gained 28% on Friday, their largest single-day percentage gain ever, following the announcement of better than expected Q3 financials. The market responded overwhelmingly positive, despite a drop in YOY revenue (-.08% to $1.87 billion), same-store sales (-3.7%) and earnings per share. CEO Dick Johnson said the company will focus on its digital efforts to reenergize the business, believing that speeding up customer access to inventory is a way to maintain market share. FL is also banking on a NKE rebound, saying that company is “on the verge of a major breakthrough in terms of product innovation and customer engagement.”

Howie Long-Short: The best single day in shareholder history seems to indicate the company’s turnaround is nearly complete, but the financials don’t reflect that. FL says that basketball is on the rebound, kids’ sales are positively trending and the company is experiencing growth within its apparel line; but I’m not sure that news warrants the gains experienced. The company remains a middle man placing their eggs in NKE’s basket; a company that foresees their future in DTC business. Shares remain down 43% YTD. It’s worth noting that Finish Line (FINL) shares popped 7% following FL’s earnings beat.

Fan Marino: NKE is promoting a shoe that can make the wearer 4% more efficient when running. The Zoom Vaporfly 4% uses a light-weight foam found in airplane insulation and a small carbon fiber plate, shaped like a spoon (propels the runner forward), to provide the optimal balance of performance and weight. Does it work? Runners World tested the shoe and gave it “the highest values ever assigned in our lab”, but George Wu, a researcher at the University of Chicago Booth School of Business ran a study indicating the shoes decreased finishing times. I’m going to need more convincing before I spend $250 to shave 4% off my 12-minute mile.

Foot Locker: Wall Street’s Got a Foot in Its Mouth

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LULULEMON REPORTS Q2 GROWTH FIGURES; REMAINS ON TRACK TO HIT $4 BILLION IN REVENUE BY 2020

Lululemon (LULU) reported Q2 profits ($.39 compared with $.35) and sales (7% compared with 4%) that beat analysts’ estimates and updated full year forecasts ($2.35-$2.42/share) that topped projections. CEO Laurent Potdevin attributed the continued growth to improved marketing, an effort to drive international sales and an increased focus on their e-commerce business. The company has also been working to increase its appeal to men and add technical innovations to their clothing that set them apart in a crowded athletic-apparel marketplace. Potdevin reiterated that the yogawear brand remains on a trajectory to hit $4 billion in revenue by 2020.

Lululemon Posts Surprise Profit Growth In Q2, Raises Guidance

Howie Long-Short: You keep reading about the warning signs of the athleisure trend coming to an end, but I don’t believe that to be the case. FINL and FL are struggling because brands are going DTC, not because the consumer no longer wants to be comfortable outside the gym.

Fan Marino: Part of the reason analysts projected lower Q2 profits/earnings numbers was because of an uptick in online markdowns. That’s great news for fans of the brands! I checked out their “we made too much” section and it has a TON of stuff with at least a 25% discount.

FOOT LOCKER MISSES Q2 PROFITS, REVENUE AND MARGIN ESTIMATES; DOWN MORE THAN 50% THIS YEAR

Foot Locker (FL) missed Q2 profits, revenue and margins estimates, driving the stock to a 52-week low. The sneaker and apparel chain is now down more than 50% for the year. FL reported same store sales were down YOY(6%) for the first time since 2009, perhaps signaling the end of the long-running athletic footwear bull market. CEO Richard Johnson stated the company will be aggressive in reviewing its 3300+ store fleet and intends on closing more than the 100 stores announced earlier this year, to get the company back on track.

Foot Locker’s struggles may stem from lack of ‘innovative new products’

Howie Long-Short: NKE is telling us they see future growth in direct to consumer sales. FL is telling us that the NKE/AMZN partnership is not an imminent threat to their business. It certainly sounds like cognitive dissonance to me.

Fan Marino: The elephant in the room? Basketball sneakers simply aren’t fashionable with kids right now.

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.

NIKE: LOOKING TO FIGHT COUNTERFEITING ON AMAZON; WILL SELL SNEAKERS DIRECT THROUGH SITE

Nike (NKE) has agreed to join Amazon’s (AMZN) brand registry program, in an effort to curb counterfeiting and non-licensed selling within the e-commerce marketplace. The partnership will also enable Nike to sell sneakers directly to Amazon customers, through the parent company site. Competitors, Adidas (ADDYY) & Under Armour (UAA) already have direct-sales deals in place with the company.

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Bloomberg: Amazon Will Sell Nike Shoes Directly Through Brand Registry

Howie Long-Short opines: Better late than never for Nike. This is not such great news for Foot Locker (FL).

Fan Marino says: Love this. Now I can have both my locally sourced produce and my new paid of J’s delivered via drone.