I’m not going to hit on every put and take on this event. The reality is that merchandising was horrible this quarter, FINL failed to manage through the cross currents in this space while Foot Locker is proving that it can. Basketball and running were both extremely weak, as FINL went too deep on the wrong stuff. Translation – Nike jammed ‘em on the right stuff. The only thing I’ll give ‘em props for is doing what it had to in order to end up with inventories in a good place heading into the current quarter.
Let’s check out the other ‘event’ in this space over the past 18 hours. New disclosure in FL’s 10K.
FL’s ‘Nike Ratio’ just ticked down meaningfully. Sustainability is both key and in question.
- The bear case on FL is that it doubled margins over a decade as a result of a major strategic vendor shift that should never really have happened.
- Due to Nike’s own agenda (to generate capital needed to build DTC infrastructure) Nike went from 40% of FL’s sales to 73%. How the FL Board allowed that to happen is beyond me. Such bad risk management.
- But the reality is that FL underinvested in stores, people, and e-comm over that time frame, and leveraged SG&A way more than it should (ie 18-19% SG&A ratio is not sustainable for ANY mall based retailer in a declining mall traffic environment – check out FINL today).
- As Nike moves away from FL (and vice versa) – even if to 55-60%-- it will be ugly and massively disruptive. We saw that in Nike’s print this week.
- BUT…we also saw Nike’s e-comm business slow to 18%, which is very disconcerting.
- This happened at the same time it has a major platform launch (maybe two – though they stretch it by saying four).
- My sense here is that Nike officially needs FL again. I got less bearish on FL last month, and outright kicked it off my Short list earlier this week. It’s on the bench, as I still think this call has teeth. But not today.
- All of that said, given the tailwind FL has at its back today, it BETTER comp at least mid-single digits. If it can’t do that at a time when Nike is doubling down on FL, than can it ever?
- As for FINL, remember the Nike/FootLocker channel conflict of 2002/3? What happened then? FINL got better product, better deals, better traffic, better ASP, better terms, and ROIC tripled. It’s a little different today…but seems to me that THE KEY call on FINL right now is whether Nike wants ‘em to succeed near-term or not? I’m inclined to say yes. Yes, FINL is now near the top of our vetting bench – long side.
Back to the FINL conf call, here’s two things I gotta get off my chest…
Management (and analysts) talked over and over again about a) tax refund timing, and b) store remodels. Why?
a) On tax refunds (ie later consumer payout = shopping later in the Spring)…this whole point is ridiculous. I’d argue that Wal-Mart has the data to show how people spend on everyday items by day, by hour/minute relative to timing of cash inflows and outflows. Finish Line certainly does not. When a person checks out at the register, are they filling out a form saying ‘yes, I am buying today bc I have tax refund money’? No they’re not. Retailers know the general impact of a sales hit in the event of store closures due to weather. But they do not know the reason behind why a person slaps down their cash/card for a pair of kicks – aside from the product being at a good price/value or not. I’ll debate this with almost any retail management team that argues otherwise.
b) Store remodels. I can’t recall a single ‘store remodel program’ that I have ever seen work in my 23 years of doing this. Why?
- Store ‘rebanner/rebranding’ sometimes works, like when Limited Brands (now LB) turned some Express stores into Victoria’s Secret. Or maybe GPS turning a GapKids into an Athleta. Or KATE turning a Jack Spade into a Kate Spade. Rugby into a Ralph Lauren store. Those things work.
- But simply renovating a store does not cut it as it relates to a ‘big idea’. Do you know what a renovated store is called? It’s called management doing its job. Stores need to be refreshed and 100% updated every-single-day. Talking about remodeling only 8% of your stores every year tells me – mathematically – that the stores on average are 12.5 years old. It’s as simple as that. And a 12.5 year old store simply does not comp consistently.
- Important note – FINL has a weighted average lease duration of 6-years throughout its portfolio of properties. Shouldn’t the refresh program be aligned? Ie 6 years vs 12.5 years? We should be seeing 16-20% of the store base ‘re-gentrified’ each year.
