The intense competition in athletic shoes isn’t limited to brands. Retailers, too, are going head-to-head over market share, with two of the biggest players — Foot Locker Inc. and Finish Line Inc. — constantly keeping market watchers on their toes.
A review of the numbers only shows New York-based Foot Locker far outpacing Indianapolis-based Finish Line in both profits and revenues.
Finish Line wrapped its second consecutive better-than-expected quarter on July 26, showing 29 percent growth in profits, to $13.7 million in Q1. Foot Locker closed its first quarter in late May with 17 percent gains in profits, to $184 million. While both specialty athletic retailers showed improvement, the $100 million-plus difference in earnings is hard to ignore. Further, Foot Locker’s earnings per share, at $1.29, are almost a dollar higher than Finish Line’s 30 cents.
“[Finish Line’s] digital [same-store-sales] increased 30 percent, and [brick-and-mortar same-store sales] increased 1 percent, which tells us that Finish Line is continuing to lose share to Foot Locker,” wrote Sterne Agee CRT analyst Sam Poser, taking a clear stance on which firm he’s placing his bet on. “We believe Finish Line does not have a distinct enough identity to effectively compete.”
Poser went on to point out that Foot Locker posted 4Q14 and 1Q15 same-store sales of 10.2 percent and 7.9 percent, with brick-and-mortar same-store sales up 8.5 percent and 6.5 percent, respectively.
While the top and bottom lines are strong indicators of a firm’s ranking among competitors, some market watchers say a closer look at Finish Line’s strategy makes them optimistic about its ability to compete with Foot Locker and other players.
“[Finish Line’s] management delivered on many of the things we were looking for: healthy comp, buybacks, margin enhancements at [Macy’s and Running Specialty Group] etc. —with an important one being a meaningful sequential improvement on the product margin,” wrote Susquehanna Financial LLP analyst Christopher Svezia of Finish Line’s Q1 performance.
In addition to Poser, Foot Locker has other market watchers in its corner.
“Foot Locker continues to defy investor concerns over a potential slowing of the athletic trend with solid execution on a steady, robust pipeline, ongoing remodels and shop-in-shop rollouts, encouraging signs of a turnaround in women’s and apparel and growth opportunities in Europe,” wrote Citi Research analyst Kate McShane on June 11.
The extent to which each company engages in promotional activity is another important consideration for market watchers sizing up the firms.
“Finish Line’s management feels very comfortable that it can sell much of the same product its key competitor can sell. However, Finish Line stores, despite its Nike Track Club shops, do not tell product stories that enhance the key brands as well as other retailers in the space.” wrote Poser. “Our recent checks indicate Finish Line has been very promotional, especially when compared with Foot Locker’s promotional activity.”
While Poser isn’t convinced that Finish Line can get past its tough merchandise margins last year, Cannacord Genuity analyst Camilo Lyon says he’s been impressed by Finish Line’s recent, apparent Jordan restocking and views the company as “back in the saddle.” So much so, he says, he upgraded Finish Line to a “buy” before last Friday’s earnings release.
“We believe the issues that drove the decline in [Finish Line’s] merchandise margins last year are nearing an end, resulting in a faster margin recovery than current estimates or guidance imply,” Lyon wrote in a note in early June.
Other important factors to watch for both companies, insiders say, include digital and omnichannel growth.
Svezia says Finish Line’s “digital remains strong.”
“Gains continue to be made in mobile (50 percent of traffic) and in the Winner’s Circle program following the hire of Imran Jooma [as chief omnichannel officer] in February,” wrote Svezia in a June 29 note.
Poser’s confidence in Foot Locker, he says, is bolstered by its digital enhancements on the back end.
“A new business-intelligence system has been put in place [at Foot Locker], and a new allocation system is being installed,” wrote the analyst in late May. “Over the next couple of years, the combined systems will greatly assist the company in making sure that the right product will get to the right stores and in front of the right customers at the right time.”
As both retailers prepare for the back-to-school rush and macro trends begin to fade — meaning companies may have a greater opportunity to show the strength of their underlying business models without significant interference from uncontrollables — experts say the competition will only intensify further.