The Premium Shoe Sales Slump Is Weighing On Foot Locker

Foot Locker Inc (NYSE: FL) is in disaster recovery mode after missing on earnings and sales in the second quarter, causing the stock to lose nearly a quarter of its value Friday.

Looking to our recent footwear industry sector recap, outside of adidas AG (ADR) (OTC: ADDYY) and Puma AG Rudolf Dassler Sport (OTC: PMMAF), most of the major footwear companies have experienced significant struggles. Coupled with a weary retail environment, the miss from Foot Locker sent nearly the whole industry down.

A Look At The Report

The company announced on its earnings call that it expects to close more stores than originally anticipated this year. Heading into earnings, no analysts had a Sell rating on Foot Locker. The outlook at the company has deteriorated rapidly. CEO Richard A. Johnson said, "When we were on the call in May, we certainly didn't see the business dropping off as rapidly as it did."

Foot Locker management believes the company has a strong competitive position within the marketplace for premium footwear, but poor performance by several of the brands weighed on the quarter. Comps were down 6 percent in the quarter, with second half comps expected to be down 3-4 percent. According to Citi Research, this was the first negative comp at Foot Locker since 2009.

According to Baird Equity Research analyst Johnathan Komp, who indicated caution ahead of the earnings report, the last time Foot Locker faced such sharp fallout was around 10 years ago heading into the Great Recession.

Deflated

Foot Locker has long been associated with performance basketball footwear, a segment that has slowed considerably since 2015 and does not appear to be coming back anytime soon. As Benzinga previously reported, the Jordan brand appears to be losing some allure, due to a combination of basketball falling out of fashion and the overextension of availability of its some of its previously most sought-after styles.

“We are not seeing retro sell out on the day of release like we used to see,” Matt Powell, the vice president of industry analysis at NPD Group, told Benzinga.

Much of the speculation regarding Foot Locker revolved around Nike Inc (NYSE: NKE)'s recent partnership with Amazon.com, Inc. (NASDAQ: AMZN) posing a significant threat to Foot Locker's business.  While those fears may have less merit than previously thought, the bigger risk is that consumers are not opting for expensive shoes anymore; basketball signature shoe sales are down and Jordan sales are down.

What's Hot?

What is hot is casual athletic, a space that Adidas has been capitalizing on, which is defined as not a premium style, but a mid-market style that is retro-influenced. Amazon's deal with Nike was adept in recognizing this trend, with the partnership opting for mid-market styles.

The industry-wide second quarter sales trend in athletic footwear was better than the first quarter, but that was more so due to calendar shifts than actual improvement. Although Adidas and Puma have been the hot brands in the industry, those two could not save the industry alone.

Related Links:

Breaking Down The Footwear Sector: Adidas Pipeline Still Strong, Under Armour Under Pressure

Foot Locker Stomped On After Q2 Miss

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