FootwearRetail #1.0 = Busted

Takeaway: The cross-currents here are incredibly telling. This is the beginning of the end for FL.

We’ll simply let this SKX blow up speak for itself (while we kick ourselves for missing the short) – at least, the market certainly will.  But we think that when put into context with a few other factors, it paints an extremely bearish picture for #FootwearRetail1.0 – i.e. the traditional footwear retailers like Foot Locker, Finish Line, Hibbett Sports, and to a much lesser extent, Dick’s.

In contextualizing this across the broader space, here are a few things to keep in mind.

1. Let’s keep in mind that Skechers is the second largest Athletic Footwear brand in the US behind Nike at 8-9% market share. Most people don’t realize that. It’s bigger than Adidas and UnderArmour combined. Specifically, the domestic wholesale business at Skechers decelerated by approximately 20 percentage points sequentially on both a 1 and 2-year basis. Wholesale missed expectations by 11.5% and accounted for all of the miss in the quarter, and then some. We haven’t seen any major brand miss at wholesale to this magnitude in a long time.

2. In its most recent quarter NKE reported North American growth of 8%, and 15% in revenue and constant currency futures, respectively.  The more interesting nugget is that it put up these numbers while citing high inventory levels in the US, which is something we haven't heard out of this company in nearly a decade. With almost every retailer at historical peak ratios of Nike as a percent of total (up to 80% for retailers like Foot Locker), and even retailers like KSS showing 20% growth in Nike over the past three quarters, there’s really only one option for growth – online.  Nike is looking towards e-comm, to add an incremental $6bil by FY20. We think over half of that will be in the US. To put  that in perspective, the ENTIRE footwear space in the US is likely to grow by less than $4bn over that time frame. We think Nike will beat its target handily – but are being conservative in vocalizing their plans as to not overtly upset incumbent retail partners. This is so bad for #FootwearRetail1.0.

3. SKX cited a ‘full’ (i.e. stuffed) and promotional wholesale channel in the US for the $39mm sales miss. The company had planned on an extra inventory turn in September that didn’t materialize as promotional levels were high and the company's broadening wholesale network turned off the spigot. Now the company is sitting on a bloated inventory position, and the worst sales to inventory spread we've seen at SKX in over 3 years.

4. Recall that the latest inventory reading at FINL, HIBB and DKS were all negative on the margin, with sales to inventory spread down -8%, -8%, and -6% respectively.