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Founded in 1988, Foot Locker is a sporting good apparel retailer with operations in over 28 countries. Its primary products consist of shoes, clothing, and accessories. It has over 3000 store locations primarily located in malls and other shopping centers, concentrated heavily within the United States. Over 70% of the companys sales are from Nike, but it does sell other competing brands such as Adidas and Reebok.
The company operates in a very fragmented and competitive shoe apparel and sporting goods marketplace. The company has many large publicly traded peers which include The Finish Line, Dicks Sporting Goods, and Hibbett Sports. The company also faces a litany of competition form small independent retailers of shoes and sporting apparel. This include individuals who look to resell shoes through online channels such as Ebay and smaller Mom & Pop retail operations.
Barriers to entry is this industry are very low as market participants can start a shoe apparel or sporting goods business with little capital. With technology, many more market participants can enter the market with very low fees, and without the inventory requirements of Foot Locker. In addition, some competitors may have higher profit margins as they have lower overhead costs as they sale through online only distribution channels. Through the dramatic increase in competitors, Foot Locker could potentially suffer from margin compression as competitor use their lower overhead expenditures to drive down costs. Foot Locker is combating this trend through exclusivity with Nike and Adidas that allows only certain shoes to be found at Foot Locker locations. In addition, Nike, Foot Lockers most influential brand,…
With a strong brand, consumers likely use Foot Locker as their first choice for footwear associated with sports. In addition, its scale allows brands such as Nike and Adidas to sell larger quantities of goods though a much more powerful distribution network of over 3000 locations. This scale if valuable to keep their brands relevant within specific markets or segments of the population. Foot Locker, and more particularly, the brands they sell also have pricing power. As 70% of the companys sales are from Nike, the brand possesses an ability to charge higher prices during inflationary periods without a corresponding reduction in volume. Foot Looker can leverage the strength of the Nike brand with its ability to charge the consumer higher prices thus increasing profitability. This symbiotic relationship is important for both entities. Nike has access to a distribution network of over 3000 locations without having to take on the credit risk, while Foot Locker has access to one of the worlds most valuable brands and exclusive merchandise.
The company appears to be an adequate investment for those looking for a much more stable, low growth business, with little risk. However, for investors looking for a higher growth business, Foot Locker does not appear adequate. From a positive perspective, the company has no debt, which makes ideal for investors worried about the potential collapse of the retail industry. The business also appears to be very resistant as the company was profitable even during a pandemic. The company generates adequate returns on equity, indicating that the business still appears to be somewhat resistant to online challengers. Unfortunately, profitability of the business has decline ever years since 2018. The same occurs if the time frame is expanded an additional two years to 2016. From 2016, profitability has declined from $664M to $323M in 2020. Revenue however has remained relatively consistent over this period.…
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