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Why Foot Locker Will Have Difficulty Pushing Back Against Amazon

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Originally posted on ARCH-USA

Morgan Stanley upgraded Foot Locker to overweight from underweight in expectation the shoe retailer has an edge over in the high-end market. pic Luke Sharrett | Bloomberg | Getty Images

Source: Foot Locker can beat back Amazon, Morgan Stanley says; upgrades stock

In the source article on CNBC analysts are upgrading FTL stock based on the premium pricing structure that Foot Locker provides adidas and Nike. They are stating that at 130.00 a pair Foot Locker offers a brand like Nike, who recently started a brand registry with Amazon, the opportunity to keep a higher cost per pair on the high end models that won’t be carried on Amazon. Foot Locker also allows Nike and adidas to maintain a presence in locations these companies don’t have brick and mortar shops. The 130/pair represents a price point that Amazon customers are not looking to reach.

Less than 5 percent of Foot Locker’s 200 best-selling shoes are available on Amazon, the analysts said, while top athletic brands like Nike and Adidas still prefer to sell shoes through the brick-and-mortar retailer at an average price of $130 a pair.

While it does appear that the high end shoe market is still in play for Foot Locker, I wrote this article a few months ago post tax season:

Analysts are expecting a bounce back from the promotional environment that has been in play since last year.

I don’t see this bounce back occurring so when that target price of 65/share is tossed around as where Foot Locker could be headed by their Fall report, I see the stores remaining at 50-55 based on Nike’s obvious push to grow their distribution through Amazon and Nike’s DTC to recover the loss in margins from diminishing Futures and diminishing sales in the US due to the growth of adidas. I don’t think $FL will ever reach that mid 70s as they were during 2016 prior to Nike’s all in approach to DTC and adidas’ meteoric rise.

Foot Locker is doing a very effective job of aligning its sales wall with the shifting brand loyalty of its customers and this speaks to their adaptability. They also recently launched an app to fix the launch of high end shoes. This ability to adjust was not discussed in the CNBC article and that lack of understanding by analysts shows a lack of understanding of what’s actually happening in footwear. As adidas grows and Nike begins to lose shelf space to adidas, Foot Locker will have to redesign its stores and “over” invest in adidas footwear. This will affect the growth that Foot Locker stores could see even as Amazon begins to shape the lower end sales.

Foot Locker, in my opinion, will continue to operate primarily with promotion because Nike has had to loosen its restraints on how their brand is being promoted. That shift in policy is at the core of why retail stores carrying footwear are not in a position to grow.