EVENTS TO WATCH
FL - New Stock Repo and Capital Allocation Plans
Takeaway: The $1bn repo announcement is not a surprise. The company is coming to the end of its existing $600mm authorization ($70mm left at the end of 4Q by our math), and every year at this time it announces its capital deployment plan following the first Board meeting of the new fiscal year.
We still really like this name as a Short. Admittedly, the next few weeks will be an uphill battle. With last night’s announcement, the print on 3/6 (which we don’t think will be outstanding, but probably won’t tank), and the company’s analyst meeting on 3/16 in NYC.
But any way we cut it, the warning signs are there. The key to this call is that the model is transitioning into a lower margin and lower-return business. Under the Hicks regime, capital was pulled from the model (stores, SG&A, working cap, capex) which took productivity and margins to new peak. The new model is one where store closure opportunities are minimal, and both SG&A and capex need to head higher to refurbish existing stores to maintain market share – and that’s a best-case scenario. In fact, the 2015 capital budget remains elevated at $220mm up from $160mm two years ago.
AdiBok, NKE, UA - Adidas launches search for new CEO
Takeaway: This was a long time coming at Adi. Not because of shareholder activism. But because the brand has been handing over market share hand and foot to Nike globally while at the same time it sat on the sidelines as UA became the #2 player in the US market. Now, there is instability at the top of the organization just as the brand is trying to right the ship. There is no clear timetable for Heiner to become the old CEO. The longer the search takes, we think = a bigger opportunity for Nike and UA to accelerate market share gains.
As for Foot Locker, we think that this is probably a slight negative development on the margin. The best possible environment for an athletic retailer is when the major brands are heavily competing for shelf space. That competition will ease before it ultimately (in a few years) intensifies. Nike and UA won't have to fight as hard, or spend as much, to get incremental space at FL. And keep in mind that Nike is already at 68% of sales for FL. Foot Locker wants nothing more than to have a strong staple of contenders looking to take a few points of share. That's not gonna happen.
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