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Foot Locker Isn’t Looking over Its Shoulder at Amazon

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Factors impacting the sales of specialty athletic retailers

As we discussed in the previous article, Foot Locker (FL) reported a disastrous fiscal 2Q17[1. fiscal 2Q17 ended July 29, 2017] as its same-store sales plunged 6% year-over-year. Analysts believe that Amazon’s increasing presence and a shift of sportswear manufacturers like Nike (NKE), Under Armour (UAA), and Adidas (ADDYY) toward the direct-to-customer channel pose a threat to all specialty athletic retailers.

Recently, Nike formed a direct partnership with Amazon. Nike intends to sell directly on Amazon compared with selling solely through third-party retailers. As shown in the chart below, more customers prefer to buy Nike products from Amazon rather than Foot Locker stores.

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What Foot Locker’s management has to say about Amazon

While discussing the Amazon threat, Richard Johnson, CEO of Foot Locker, stated during the fiscal 2Q17 earnings call that the company was not worried about Amazon. He added that Foot Locker deals primarily with the higher end of the market, while Amazon focuses on lower-priced products.

“At the premium end of the market, most of our customers don’t work to just buy a specific product at the end of spring. They want that product to have a connection to an experience they find meaningful and want to participate in,” noted Johnson.

He added, “For lower price largely and differentiated product share, Amazon and other online sales channels are increasing their share of the sneaker market.”

What do analysts say?

Analysts, however, have a different take on this trend. John Kernan of Cowen & Co. stated in a note, “Foot Locker’s same-store sales and operating margin will continue to fall from peak levels as the transition to digital and supply of athletic and lifestyle footwear continues to shift to a variety of channels and emerging brands.”

Kernan added, “We think this overhang, along with Nike, Under Armour and Adidas’ plans to dramatically increase their own direct-to-consumer businesses, will prevent Foot Locker share from seeing a meaningful multiple expansion.”

Investors looking for exposure to FL could consider the First Trust Consumer Discretionary AlphaDEX ETF (FXD), which invests 1% of its portfolio in the company.

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