There are few stores in the retail world that consistently draw huge crowds, but one of them is Foot Locker.
From the newest Jordans and Adidas Yeezy's to the more recently coveted New Balance's and Crocs,
sneakers saw an unprecedented growth in 2020 and beyond.
Sneakers are a massive global industry set to jump over the $100 billion mark
in a few years.
Foot Locker is a mall staple, where the staff are dressed like referees and shoppers line up for the latest sneaker
releases from Nike, Adidas and New Balance.
It also sells a variety of athletic apparel, everything from track pants and hoodies to basketball
jerseys. In the fourth quarter of 2021, Foot Locker had sales of $2.3
billion, almost 7% higher than a year earlier.
"Retail is a game that starts new every day, right?
So you have to win a customer every day.
You have to win that relationship back and make sure that you're the first place that they want to go and shop.
So our visual merchandizing, our digital merchandizing, our merchandise selection and assortments, you know, the
creation of our private label brands.
Those are all things that we're working on, working really hard on, but we have to continue to
evolve." The e-commerce side has seen strong growth as well.
In 2021, Foot Locker digital sales reached over $2 billion, representing 28% of
the company's total sales.
However, the sneaker chain is facing mounting headwinds, not only from other brick-and-mortar sporting goods stores,
but also from leading athletic brands like Nike, who are expanding their direct-to-consumer platforms.
In February 2022, Foot Locker's stock plummeted almost 30% after it announced it was cutting
back on its purchase of Nike goods and diversifying its offerings.
The company said by the fourth quarter of 2022, it hopes not to have a single vendor represent more than
55% of its total supplier spend.
In fiscal year 2020, about 75% of all merchandise purchased at Foot Locker came from
Nike. The company is also reinvigorating its brick-and-mortar operations by making moves out of the
mall, rolling out about 300 power stores over the next three years, with the hope of reaching customers where they
live. Power stores are typically four times the size of its standard mall-based stores.
With the digital world's rapid growth and many brick-and-mortar businesses struggling to stay afloat, the
question remains: Can Foot Locker survive the digital age of
sneakers?
Foot Locker got its start in a Southern California mall in 1974, but its legacy goes back even
further. The sneaker store began as a segment of Kinney shoes, which had more than 300 shoe stores in the
U.S. Kinney's was in turn owned by discount retailer Woolworth's.
At the same time, athletic shoes were beginning to become more popular in the fashion world, with jogging and
racquetball being among the most popular sports.
In 1977, Vogue pinned "real runner's sneakers" as status symbols, worn by the likes of Farrah
Fawcett and Mick Jagger at the time.
"Foot Locker started out as a division of what we would call in the industry a 'brown shoe company,' people that were
making dress and casual shoes as opposed to athletic shoes.
Tennis was the sexy sport in the seventies, and the-the original management of Foot Locker had this
vision that there would be generations of kids who would want to wear nothing but athletic footwear.
And so they started out with this chain with exactly that idea, and it was wildly
successful." Basketball was another sport that helped fuel sneakers as a cultural phenomenon,
rather than a simple commodity.
Sports stars, famous musicians and celebrities all wore sneakers through the sixties and seventies, giving them a
refreshed, more fashionable image.
Nike, Adidas and Reebok all arrived on the scene from the sixties to the eighties and invigorated
athletic fashion culture.
In 1982, the First Lady Foot Locker opened, with Kids Foot Locker following five years later.
By then, Foot Locker had fully established itself as a go-to athletic store, with the tagline "America's Most
Complete Athletic Footwear Store," carrying some of the most popular brands: Adidas, Nike, New
Balance and others.
Foot Locker's position at the time was key, as many sports stars were signing deals for signature sneakers, and in
1985, the first ever Air Jordan 1's in the beloved "Bred" and "Chicago" colorways were
released, prompting some of sneaker culture's first iconic moments.
The company was branching out, too, acquiring sports retailer Champ Sports in 1987 and
Eastbay a decade later, a brand that holds special nostalgia for many sneakerheads in the late 1990s
and early 2000s and helped bring cultural relevance to the Foot Locker name.
In 1997, with the coalescence of Eastbay's e-commerce presence, the company also launched
FootLocker.com.
"Well, I think our ultimate role is- our current purpose statement to inspire and empower youth culture.
We were founded back in 1974 and Puente Hills, California.
We've expanded globally.
We've gone from a mall-based retailer to more power stores, community stores, like we're sitting here in the
Heights in. And it really is all that time has been about serving the youth
consumer. Right?
Those- the youth is the future of the world.
And we allow them to use sneakers and apparel and hoodies for their own
self-expression. And I really you know, we've really found a voice around that in the last few years.
But even going back to 1974, that's what we were doing."
Now the footwear space is continually expanding.
In 2021, the total global sneakers market was valued at approximately $79 billion
and is expected to reach a value of $120 billion by 2026.
Today. Foot Locker's footprint in the brick-and-mortar space spans across 2,900 stores worldwide.
It diversifies its offerings through several store formats, which cater to different demographics.
Its mainstay stores and Champ Sports are its primary brands, with the highest store count across Foot Locker's
portfolio, which target male shoppers.
Lady Foot Locker, Six:02 and Kids Foot Locker are its other brands.
And in 2013, it acquired Runner's Point Group, a specialty athletic store based in Germany.
More recently, Foot Locker has enhanced its physical presence with its power stores, bigger, more innovative
retail spaces than a standard mall-based store.
CNBC visited its Washington Heights location in New York City, which features two floors, exclusive
product lines from local designers and dedicated lounge spaces for customers to hang out.
"They love the experiences in our stores, you know.
They love our stripers here at Foot Locker.
They love our team in blue at Champs.
They love the steppers over at Sidestep in AMEA, and they see them as their local experts around
sneakers, around cultural events, cultural things in the neighborhood.
And it really has helped us make this pivot from being mostly a mall-based retailer
to now having community and power stores that are deeply connected to the communities that we live and work
in."
Foot Locker's ongoing relationship with some of the most sought-after brands also allows it to reach a variety of
customers. Nike, Adidas and New Balance, all iconic sportswear brands with poignant influence
in the athletic fashion world, are part of its product lineup.
With its beginnings and primary strengths in brick-and-mortar, it poses questions towards Foot Locker's
future, as brick-and-mortar has presented challenges for multiple companies over the last several years.
Sports Authority and Modell's are two notable bankruptcies that have occurred in the athletic retail industry in
recent memory.
Overall, Foot Locker has enjoyed a lasting presence, but it has, of course, had some
setbacks.
"And certainly during the pandemic, we saw malls get in trouble.
We saw people not able to enter stores.
I remember on March 17th of 2020, we closed 3,500 stores around the
globe. Right?
And that's a scary thing, you know, to suddenly say 75, 85% of our business
at that point was coming through brick-and-mortar stores, and we suddenly had to close those stores.
But what we found through the pandemic is the consumer has picked up some new habits, so more consumers bought
online. But when our stores were able to open, they came back in waves, right?
They came back really strong.
And they love the experiences in our stores."
Despite the setbacks in 2020, Foot Locker successfully bounced back in the following year,
"Foot Locker reported strong sales coming out of the Covid pandemic as stores reopened.
There was a lot of stimulus in the market, and we think they did gain some wallet
share. Those results weakened significantly into the fourth quarter of
2021 and into the first quarter of 2022.
That gives us some concern.
We see a lower-income consumer that's facing enormous headwinds from inflation and just general
macro uncertainty. And I think that in general, that's going to affect Foot Locker pretty deeply in
2022.
2021 was not without its challenges either, however.
In May, it began to wind down its Footaction brand of stores.
"We do think the company has far too many mall-based stores in the U.S., 80% of which are in malls.
The company's limiting its Nike and Air Jordan purchases to no more than 55% of its store
inventory. So that's down from 75% in fiscal '20.
There's a big change in strategic direction here.
It's tough to call a bottom, we think, in the company's traffic and same-store sales
results.
More than those difficulties, Foot Locker also faces stiff competition from other brick-and-mortar athletic stores,
such as Dick's Sporting Goods and JD Sports, which owns mall-based retailer Finish Line.
Beyond its domestic endeavors, Foot Locker is also looking to expand its international presence.
In August 2021, it acquired two shoe retailers, WSS and Atmos, for $1.1
billion.
"We really see the Asian markets as ones where streetwear and culture, sneaker
culture sort of emanates from.
And we were able to, during the pandemic, actually acquire a great company, a great brand in
Japan called Atmos, which really focuses on the highest heat product.
Hommyo San, the founder, he really has a great connection to street culture
and Japanese culture and really creates some great heat products that we believe we'll be able to take
globally.
2015 was a massive year for sneakers.
Adidas, Yeezy Jordan and Under Armour were releasing some of their most successful silhouettes.
So much was already going on in the sneaker landscape.
And still more was to come: that same year and the next, two of the major players in the digital space
made their debut on the scene.
StockX and GOAT.
Widely regarded as two of the most rapidly-grown sneaker and streetwear reselling platforms, these
companies created an online marketplace for sneaker resellers and streetwear enthusiasts alike.
"Where we started was a belief that we could build a better marketplace model —
better for both buyers and sellers — by bringing trust, by bringing pricing visibility,
authenticity and frankly, bringing access to products that were not always
easy to get into your- into your hands.
And our approach to doing this, our thesis was that we could leverage stock market mechanics to
solve for a lot of the challenges that we saw in incumbent marketplaces."
Consumers could now buy and sell their sneakers in one place online, changing the sneaker game indefinitely.
"We've helped to grow the market by making it more accessible to more people.
So for sellers, we're helping sellers globally unlock economic opportunity.
No matter where that seller is located, we're providing them access to a global audience and we're making it
seamless. On the buy side, you don't have to worry about, ' Am I getting something that is a fake product?
Am I getting something that is used or in a damaged box?'
To add on to the already rapidly-changing landscape, Nike launched its now popular SNKRS app, which offers a
specific platform for Nike's most sought-after releases, marketed largely to sneakerheads.
Foot Locker's e-commerce presence on its flagship site, FootLocker.com, as well as its online-only brand,
Eastbay, allows it to continue to share a piece of the pie on the digital side.
With StockX and GOAT growing into key players, Foot Locker invested $100 million in GOAT
Group in February 2019, which proved useful to its business, as the growth of sneaker
e-commerce in the following year, during the pandemic, was explosive.
"One of the interesting things that happened during the pandemic was a real surge in purchasing sneakers online.
In 2019, we sold about 30% of the sneakers in the U.S.
were purchased through e-commerce and in '20 that surged to 40%.
We gave back a little bit in '21, and my expectation is we go back to growth again, but we leapt
probably 3 to 5 years in terms of the penetration of e-commerce in essentially
3 to 5 months. Foot Locker was a big part of that.
They have a very, very well developed e-commerce platform.
They know who their best customers are and talk to them frequently, involve them in product.
They are now using their loyalty program to help the sneaker enthusiast, the sneakerhead,
get to more exclusive product more easily."
Some attribute the sudden increased interest in sneaker culture to the premiere of "The Last Dance," an ESPN
docuseries detailing Michael Jordan's laudable career, along with the sneakers he wore during his most iconic
games. Following the premiere, secondary marketplaces like StockX saw record-breaking
numbers in Jordan sales, and similarly, Foot Locker's stock price increased from
$22.05 on March 31, 2020 to $34.12 in June
2020, and continue to steadily rise to a high of $63.98 in June
2021. The $6 billion resale market has also catalyzed into physical stores, almost
solely dedicated to that secondary market, Flight club and Stadium goods are those newer players,
impressive manifestations of the resale market's brick-and-mortar sustainability.
In 2018, GOAT group merged with Flight Club, further weaving together the markets channels.
However, the reselling phenomenon has wrought havoc across many more industries due to the pandemic.
The appeal of profitability and rise in online shopping prompted an increased use of bot technology.
Bots allow a user to buy a product, often a popular one, in a matter of milliseconds, rather than
manually adding to cart and checking out.
Similar to the recent outrage towards console bots, some of the most anticipated sneaker releases in the past
several years have sold out almost instantly due to bots, resulting in vocally frustrated consumers.
But unique to the sneaker industry, its participants on both the consumer and retailer sides have had ongoing
issues with bots as early as 2013.
"The bots are a real problem, and the industry is working on several different initiatives, I guess I should say.
One of the things that seems to be working is to use invitations to your best customers.
So instead of opening up the doors and letting anybody come in, they're literally going out and saying, 'Okay, this
customer bought X number of pairs of shoes last year.
Let's send them a personalized invitation with a limited window of their ability to come in and
buy.' One of the big problems for both footwear for retailers and brands in this space is
that the server simply can't handle the traffic on- on a major launch date.
One of the ways to combat that is to spread that- that out over a longer period of time.
And I think the invitation model may get us there."
Foot Locker is not alone in facing dissatisfaction from customers for products selling out in an instant.
The problem is industry-wide, and no company has managed to defeat the bots entirely.
Even with anti-bot measures, some are so advanced that they can bypass the safeguards.
"It's an ongoing battle, right?
Honestly, the bots are fast.
We have to be faster.
We've introduced a launch reservation system, and our goal is ultimately to get more of the product
in the end users hands.
So we've worked hard to create a more equitable launch reservation process.
We've rolled out our FLX program, which is one of the ways that you can get a little bit of a head start on your launch
reservations and on launch day.
And we really are trying to create a marketplace of fairness."
Despite rapid changes in digital retail and the uniquely chaotic sneaker world, it is safe to say that Foot Locker's
name is still relevant, and maintaining that relevancy is made easier from the fact that it simply has access to the
most anticipated sneaker releases.
"Nike's e-commerce business will likely grow globally from $11 billion in sales to $32 billion in
sales. Their wholesale channel, which Foot Locker is represented in, is not likely to grow over the next five
years. And that's just Nike limiting the amount of product that goes into that wholesale channel.
Foot Locker has too many doors; Nike cannot service all the doors properly.
Foot Locker has to be able to shift its business to newer vendors, such
as On Running, HOKA, Vans, Puma, Under Armour.
It's a riskier strategy than what they've relied on in the past."
Foot Locker's newest challenge, however, is Nike's decision to pull some of its products from the brand in an effort to
focus on direct-to-consumer sales in its own stores.
In March 2022, Foot Locker shares crashed shortly after the announcement, and it quickly
lost $950 million in market share.
"We downgraded Foot Locker to market perform back in March and really
reflected in down data that we were looking at in terms of both website traffic, Google search data
and just overall traffic in the mall.
Foot Locker stock declined 30% the day it announced the reduction in inventory purchases.
It also issued sales and earnings guidance that was far below consensus expectations.
The stock's valued at very cheap cash flow multiples and earnings multiples.
There's just so much uncertainty that investors are looking at that it's difficult to value the business right
now."
"Well, we have a great, multi-decade relationship with Nike, and we continue to evolve that relationship.
Clearly, some allocations have changed, but the truth is, we're on a journey.
We've been on this journey to diversify our product offering, and we listen very closely to our consumers, both
digitally and physically in store.
If you look at the numbers from our fourth quarter, we had started this journey to have less Nike product in the-
in our stores based on customers' demand.
We end up having a great relationship with Nike, utilizing their great products,
their storytelling, but adding that to the other great brands that service this industry, and we end up being
strong partners to them all."
In spite of being part of an industry that is always changing, for now, Foot Locker intends to stay.
"We've announced that we're going to have 300 community-based stores by the end of 2024.
If we can help them grow, we just keep fueling the community that we live and work in.
We're going to continue to drive high heat in storytelling, both digitally and physically, through physical
spaces, but more importantly, through our digital storytelling, in our connectivity with the consumer."