We stated in our last HBI note (HBI | Champion Turning into a Liability) that we’d be diving in more on Champion’s growth opportunities both in the US and internationally.
In the US, the retro athletic fashion trend for Champion is working, we don’t truly know how long it will last or how big it can be. But one thing we do know is what almost always kills a brand growth cycle, and that is over distribution without real investment in marketing, R&D, and product innovation to drive the next cycle of growth. Champion just grew +80% in a quarter after 2 years of outsized growth is feeling like overdistribution, while ad spend and R&D rates for HBI hit new lows last year.
With that said, we took a look at where Champion distribution stands today by touring a regional mall. I hate the concept of visiting a singular mall and extrapolating to the other 1,099. But whether we’re online, or in the mall, the punchline is Champion looks overdistributed to us domestically.
We toured the Danbury Fair Mall (good proxy for an above average ‘B’ mall) last week to check out what stores were carrying Champion product and what the assortment looked like.
Within the mall of ~190 stores Champion product can be found in 11 stores. Those store include Foot Locker, Champs Sports, Dick’s Sporting Goods, The Finish Line, JCPenney, Lord & Taylor, Macy’s, Olympia Sports, PacSun, Zumiez, Lids (Not Pictured). Pretty much every store that could carry Champion does carry it, with the exception of Journeys and Sears. Most of the stores have more Champion product than what we would consider sustainable. It’s perhaps the right amount for a hot fashion brand, but it leaves little to no room for additional square footage for the brand. That means growth will have to come from velocity. We might not be at the peak in the US yet in absolute sales, but we are getting close; we are likely at the peak growth rate in the US and the amount of inventory sitting in stores is potentially a risk.
-The amount of Champion apparel inside Foot Locker is surprising (image below shows the displays). There are 2 full tables, and 3 hanging displays. That’s roughly the same amount of apparel as adidas and Nike combined. We can’t see FL allocating more space to Champion product, and a sell-in of this size (assortment and store base) will be a tough comparison. Remember FL also has Champs Sports, which had a sizable assortment as well, though smaller than Foot Locker’s.
-Macy’s looked over stocked, particularly in men’s, and even had some of the product on a 30% off “training” sale rack.
-On the 1Q call HBI described “growth was driven by strong comps and space expansions at existing accounts, new distribution including the sporting goods channel as well as growth in our consumer directed channels.” For sporting goods, we’re not sure exactly who it is referring to, since the major sports stores previously had Champion. DKS has clearly added to its assortment, and we would describe floorspace dedicated to Champion as appropriate. However, we should point out that DKS has even more space allocated to another Retro athletic brand in Fila.
We also checked out a local Target for any changes on C9. Anecdotally, the assortment for C9 looks roughly the same, however the floorspace has been contracted, particularly in Men’s. This makes sense as Target likely wants to make the transition look as gradual as possible. So new product is introduced alongside a C9 space, and then SKUs, are progressively reduced.
Again, in the FAQ last quarter the company stated:
Q: Can you provide an update as it relates to your plan for C9 after the January 2020 transition?
A: We continue to see significant momentum building globally within the Champion brand (excluding C9) and we are focusing our energy and resources on maximizing this business. While there may be an opportunity in the future to build the C9 brand with another retailer, we currently do not have any plans in place.
We think this commentary is very bearish for the future of C9.