Best Idea Long Nike is at it again, restricting and/or cutting distribution to retailers that they don’t think are properly aligned with the Nike brand long term as a premium athletic brand. One of those retailers is DSW/DBI – also on the list are Urban Outfitters (URBN) and Big Five (BGFV). Clearly, not good news for DSW parent DBI, which we have on our Position Monitor as a Best Idea Long. But consider this…Unlike the Foot Lockers of the world (which we’re also Long) where Nike is upwards of 80% of the assortment, at DSW it is well below 10%. That’s part of the problem Nike has with DSW as a point of distribution – it’s not ‘in bed’ with Nike as a partner. When dressy shoes – which is what DSW is known for – aren’t selling, it ups its Althetic/Sports-Inspired assortment. That’s not what Nike wants. The upside is that it will likely be six months until the changes take effect, and until then Nike will have time to work with Adidas, New Balance, Asics, Puma, On, UnderArmour, and half a dozen other brands that are clamoring to get shelf space in DSW – and it will be at better margins for DSW than Nike currently has to offer (Nike keep more of the profits). More importantly, it will prompt DSW to allocate more space to dressier brands – which it is known as a destination for in the first place.
The part of the DBI story that gets most lost in translation is that the company currently sells $300mm in Private Label dressy footwear in its stores, and outsources that to third parties (and pays up accordingly). During covid, the company made the switch to have its Camuto Wholesale branded division manufacture the private label product – which comes at an incremental 1,000bps in gross margin. On top of that its taking the internally manufactured private label product from $300mm to $725mm – which should push Gross Margins back to prior peaks. Consensus isn't even close to picking up on that.
I’m not going to pretend that I’m happy about this Nike announcement – but one of my concerns has been that DBI has been upping its Athletic offering at the exact time the consumer is going to move back to a dressier look. This is a self-correcting action that it will have to shift 5-7% of its assortment come back-to-school – which will likely be at least in part back to a dressier aesthetic. That’s where we think the consumer will be pivoting at that point in time.
Our numbers remain 2x the consensus, and this Nike news doesn’t change that. As you can see in the table below, we’re way off the consensus in margin assumptions for the next two years. If you don’t want to deal with the drama around DBI and its Nike allocations, I’d suggest swapping into Caleres (CAL) which is also a Best Idea Long and we think gets you paid on more of a front-loaded basis with similar longer-term upside.
Check out our Black Book Presentation from earlier today for full details on each -- as well as our take on Nike, which we alluded to in our presentation.
CAL & DBI Black Book Replay CLICK HERE
DBI FINANCIAL SUMMARY AND VALUATION
CAL FINANCIAL SUMMARY AND VALUATION
