Why Foot Locker’s Coronavirus Recovery Depends a Lot on Nike

Analysts have long looked at Nike’s product pipeline as well as overall performance as indicators of Foot Locker’s future success. (The reverse is also true.)

The sportswear brand has deep ties with the specialty athletic company, making up about two-thirds of its sales. But as Nike ramps up its direct-to-consumer business amid the coronavirus pandemic, Wall Street is keeping a close eye on the potential impact on its retail partner.

According to Susquehanna Financial Group analyst Sam Poser, the COVID-19 health crisis has led some of Foot Locker’s key brands, including Nike, to direct investments toward and focus on their own digital DTC channels.

“Prior to the crisis, we were of the mindset that Nike needed Foot Locker to reach the full breadth of Nike’s potential customers,” Poser said. “Today, while Nike still needs FL, this need may be to a lesser extent than it had been prior to the crisis, especially if it takes a long time for consumers to return to the mall.”

Poser, who lowered his price target on Foot Locker from $28 to $25, also cited increased competition and pressure from rival JD Sports, which recently acquired Finish Line.

Foot Locker has already reopened more than 1,400 stores, or roughly 45% of its fleet around the world, with more outposts scheduled to reopen based on local and state government guidelines. As of yesterday, about 900 locations across 31 states in the United States and Canada have opened back up their doors.

Over the past few weeks, the company reported that it had begun to see some trends emerge: While locations that serve local communities — including those at strip malls and shopping centers — have recorded “strong results,” performance at stores that are “more dependent on tourism” (think units at airports and high-traffic metropolitan areas) have been more challenging.

“Taken together, while traffic is down, customers are excited to be back in our stores and their intent to purchase is high, which has led to meaningful improvements in conversion,” chairman, president and CEO Richard Johnson said in the company’s earnings conference call.

According to data from JPMorgan, approximately 27% of Foot Locker’s core domestic store fleet is located in high-tourist traffic states like New York, California and Florida.

What’s more, like Poser, JPMorgan analyst Matthew Boss — whose price target on Foot Locker remained neutral at $29 — also reiterated the importance of Nike to its retail partner’s overall business: Estimates from the investment banking firm show that Foot Locker currently generates about 65% of its sales from the athletic apparel giant’s products.

“Any strain in the company’s relationship with Nike could affect the allocation of footwear and apparel it receives, disrupting its business model of selling full-priced, high-end products,” Boss added.

During the first quarter, the New York-based company logged a net loss of $98 million, or 93 cents per share, compared with last year’s net income of $172 million, or $1.52 per share. Revenues for the three months ended May 2 declined 43.4% to $1.17 billion, and comps decreased 42.8%. Analysts had anticipated earnings per share of 49 cents and $1.58 billion in sales.

To improve liquidity, Foot Locker borrowed $330 million under its $400 million revolving credit facility, trimmed capital expenditures to only essential projects and minimized nonessential spending on marketing, as well as limited rent payments and reduced merchandise purchases.

In addition, its CEO and senior executives have agreed to reduce their salaries and defer their incentive compensation. The board of directors has also temporarily suspended its cash dividend beginning with the second-quarter payment.

As of May 2, Foot Locker’s cash and equivalents totaled $1.01 billion, while the debt on its balance sheet was $451 million.

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