Foot Locker’s recent earnings miss is highlighting broader setbacks in the athletic footwear industry.
Shares of the footwear retailer plunged in the wake of a softer-than-expected first quarter sales and earnings report on Friday. After a strong holiday season, consumers pulled back on discretionary spending for items like sneakers, which impacted Foot Locker’s results, said Foot Locker CEO Mary Dillon in a call with analysts. This downward trend continued into May and forced Foot Locker to use an aggressive promotional strategy to manage inventory excesses and drive demand.
As of Monday morning, Foot Locker’s shares were still down 5 percent. Shares of Nike, a key brand sold at Foot Locker and strong indicator of the overall athletic footwear market, were also down more than 3 percent Monday morning.
Like Foot Locker, brands like Nike have also been impacted from a softer consumer spending environment in light of inflation, which has led to inventory excesses. At the same time, while shoe prices have continued to rise at a decelerating rate for the last few months, sneakers are still currently much more expensive than they were in 2022, with prices rising almost 1.5 times faster in 2023 than they did in 2022, according to a recent report from trend forecasting platform Centric Pricing.
“Athletic footwear brands have been speaking about excess inventory in the channel. Some have assumed the excess is from brands other than Nike,” wrote UBS analyst Jay Sole in a Friday note to investors. “However, with Foot Locker’s news on comps and shrink, the market is likely to conclude Nike is also feeling the effects of the softgood consumer spending slowdown which began in March.”
Nike’s DTC arm has been a top priority for the last few years, though analysts have doubted the sustainability of neglecting its focus on wholesale. In recent quarters, Nike’s inventory excesses have led to an outsized growth in the wholesale channel, as it offloads merchandise. In March, Foot Locker touted a revitalized partnership with Nike after saying last year that the amount of Nike product in stores would be significantly less as the Swoosh accelerated its shift towards DTC sales.
However, according to one analyst, this increase in Nike product at Foot Locker was likely just a symptom of Nike’s need to offload excess inventory.
“Nike realized that the moderate business was needed, and [the brand] was not capable of effectively driving the moderate business through its own direct channels,” wrote Williams Trading analyst Sam Poser in a Sunday note to investors. “The improved relationship with Nike that Foot Locker management alluded to on their recent earnings call is likely being done on Nike’s terms.”
While Foot Locker is touting its partnership with Nike, sales of non-Nike brands were 35 percent in Q1, up from 33 percent the prior year. The retailer expects to hit 40 percent penetration by 2026 as it doubles down other popular brands like On, New Balance and Crocs.
“We also continue to see strong growth from brands like New Balance, Puma and Asics as well as outperformance in the Adidas brand, resulting in the diversity of our brand mix beyond our top brand Nike,” Dillon said in a call with investors.