FL | Nike Found Its Ceiling

Takeaway: Nike officially hit a ceiling at FL. Neutral event for NKE. Super bearish for FL.

Here’s a bearish chart for FL, and based on our conversations with investors over the past few days, this one’s squeaking past the goalie. 

In Foot Locker’s 10K, the company disclosed that the percent of its purchases from Nike went DOWN in 2015 to 72% from 73% a year earlier. A whopping 1%, you say? Does this REALLY matter? Yes. And here’s why…

1) The share gain for Nike from 50% to 73% has been the primary driver of FL’s gravity-defying earnings recovery. Nothing that Foot Locker sells drives more traffic and boosts ASP more than something with a Swoosh on it.

2) We think that Nike will add $10bn in online sales by 2020, and that’s off a base of $32bn. How we do the math, Brick&Mortar sales are likely to be down every year – unless industry sales grow in excess of 6% (and that only happens when we’re at the peak of a cycle). And let’s keep in mind that it’s not only Nike that is shifting online.

3) At the same time Nike’s percentage showed that 73% is likely the ceiling at Foot Locker, we actually saw FL’s Footwear Ratio go up 300bp to 82%. So it sold more footwear, but less of it was Nike (thank you Steph Curry/UA)

4) FL bulls might argue that the company still comped well with less Nike going through the pipe. Yes, that’s true. But in the US, FL comps last year went from ‘low DD’ in ’14 to ‘high singles’ in ’15. We’ll call that a 300-500bp slowdown in comps, with just  100bp less in Nike product as a percent of total. What happens if (when) the Nike ratio goes down to a healthier (but still unhealthy) 60%? FL comps are solidly negative in that scenario – there’s really no way around it. With no square footage growth, peak gross margins, higher investment in SG&A and capex to compete against its vendors, this could easily cost FL 1,000bp in RNOA, $2-$3 in EPS, and 40% of its market cap.

FL remains at the top of our Best Ideas Short list.

 

FL Showed Us The Nike as % of Total Purchases Have a Ceiling in Low 70s. That’s Bearish From Here.

FL | Nike Found Its Ceiling - 3 31 2016 chart1

People Think that Ken Hick’s Owns FL’s Recovery. He Was Good. But Nike Was Better.

FL | Nike Found Its Ceiling - 3 31 2016 chart2