I continue to gain confidence that we’re going to see a reversal in margin trajectories between Foot Locker and Skechers. Though clients know my thinking as to why, there have been 2 nuggets in as many days that strengthened my view that SKX margins are heading lower by at least 3pts, and FL is going up by about the same.
1) FL: Industry sales trends continue to look good in aggregate. But when peeling back the onion and seeing which channels look good and which look bad, it is clear to me that the strength is in the athletic specialty channel, and weakness is confined to channels that are overweight low-profile (i.e. National Chains).

FL reports EPS after the close tonight. The company has missed each of the past six quarters. Not a great track record, by any means. But expectations look like they’re in check, and I think that inventories are under control. I still like the margin leverage on this name as traffic picks up and the major brands (esp. Nike and Under Armour) get into the ring and duke it out with running and basketball offerings over the next 12 months. There’s enough juice here to sidestep industry margin/sourcing pressure for at least a few margin points.

2) SKX: This Skechers situation is fascinating. After upping the bid and getting shut out twice, Skechers management is still trying to get sucked into this black hole by publicly pursuing HLYS. I won’t elaborate again on my thoughts (check out my 8/13 post “Deal or No Deal, The Damage is Done”) other than to reiterate that this is the last straw for a company that is over-earning in the wrong part of its cycle.
Share gain is coming from the right place for FL, not for SKX.