Nike vs Foot Locker

Introduction
Nike and Foot Locker are two different companies with highly complementary businesses. Nike is a designer and marketer of athletic footwear and apparel, and is the industry leader in that business worldwide. Foot Locker is a retailer of athletic footwear and apparel. Neither company does any manufacturing – Nike outsources that – but they both are heavily engaged in marketing and therefore have a similarity in terms of marketing and sales to the same customer base. Nike has long been a key supplier to Foot Locker, and Foot Locker a vital vendor for Nike. Nike accounts for around 70% of Foot Locker business (Jiang, 2018). Because these companies do different things, but for the same market, and have a highly symbiotic relationship, they make an interesting financial case study.
There are several ways to compare these two companies financially. First is the financial metrics, which tell the story about how large each company is, and what the state of their business is. The valuation of each company will be influenced heavily by how their business is doing. But the valuation of each company also has a future-facing aspect, and that will also need to be taken into consideration. Further, there are operational aspects, given that they are in different businesses. Nike sells globally, for example, while Foot Locker has more of a North American focus to its business.
Stock Market Performance – Nike
According to Yahoo! Finance, Nike has a current stock price of $83.44, and a market cap of $131.147 billion. This current price is not far from Nike’s 52-week high of $90.00, and well off the 52-week low of $66.53. This range, however, is relatively small, but the market has also traded in a fairly tight range of late. The 52-week high was back in April, and that level was the high point for the stock in the last two years. Nike’s stock has seen a fairly steady, if slow, increase in value since the beginning of 2018.
Nike stock has a beta of 1.07, indicating volatility just above that of the broader market. The limited range within which Nike trades would have led to a prediction of low volatility. In general, Nike operates in a mature market, and has saturated that market. There is only limited room for growth without stealing share from smaller competitors.
Nike has an earnings per share of 2.57, which gives the company a price/earnings ratio of 32.50. This P/E ratio is appropriate for a firm where the market is forecasting moderate growth. Surely this relates to Nike’s strength as a company, which will allow it to continue expanding, even if it has to do so slowly. Some recent ventures, including one for exclusive shoes for Foot Locker, have helped investors to be optimistic about Nike stock.
Stock Market Performance – Foot Locker
According to Yahoo! Finance, Foot Locker’s price is $43.12 per share, which gives the company a market cap of $4.84 billion. The current price is not far from Foot Locker’s 52-week low of $39.06, and is well off the stock’s 52-week high of $68.00. The company saw this high at the beginning of April, the same time that Nike did, but Foot Locker stock has fallen significantly since that point, taking only two months to hit the 52-week low at the end of May. A slight rebound has occurred since that time.
Foot Locker stock has a beta of 1.53, which indicates that it has much higher volatility than the general market. The reason for this volatility is difficult to discern superficially, as its industry is roughly the same as Nike’s but Foot Locker is a much smaller company, perhaps not dominant in its market but very large relative to many competitors. However, there are major retailers that can undercut Foot Locker, so the competitive environment probably is quite a bit harsher for Foot Locker.
Foot Locker has an earnings per share of $4.79, which means that it currently as a price/earnings ratio of 9.01. That is a fairly low P/E ratio, indicating that the market does not see much upside in Foot Locker’s business. The recent sharp drop in the company’s stock price of course affects the P/E ratio, but the drop must have been caused by some factor that caused investors to lose optimism about Foot Locker’s growth prospects going forward. However, further research will be required to understand the current dynamics of Foot Locker’s stock.
Nike vs Foot Locker
Nike is a much larger company than Foot Locker, and that influences how the market perceives the stock. Nike has one of the world’s most recognizable and valuable brands, is the leader in its market, and operates globally. As such, the market would reasonably perceive Nike to have a fairly stable income stream at the very least. But the company does have enough resources to continue to build new markets for its brand, even as its existing markets enter maturity. Thus, the market has given Nike stock a healthy valuation, and the stock is currently trading near its 52-week high.
By contrast, Foot Locker is considered to be significantly riskier. It is a mid-sized retailer, with a specialist market, and high dependence on a single customer. Where Foot Locker needs Nike, at the end of the day Nike does not need Foot Locker. The market sees Foot Locker’s business as being more vulnerable to outside threats, and therefore has low expectations for future growth – the low multiple – and Foot Locker also experiences much higher than average volatility. In many cases, a smaller company or one with a more precarious market position will see higher volatility.
Nike vs. Foot Locker vs. S&P 500
Using the comparison chart function in Yahoo! Finance, the performance of the stocks of both of these companies can be compared with that of the broader market, in this case the S&P 500. While Nike might be compared to the Dow, Foot Locker’s size makes the S&P a better fit for comparison, and the S&P is a much more diversified index overall.
In the first three months of the year, Nike and Foot Locker traded in a similar direction, a slow, steady upward slope. Their fortunes to the beginning of April appeared to be tied to the general sentiment about the athletic footwear and apparel business, and they both peaked around the same time in the first week of April. The S&P 500 over the same time period was rising, but much more slowly. The broader market was seeing a general upswing due to relatively solid economic performance. The difference in volatility between Nike and Foot Locker was not apparent during this period, and both seemed more volatile than the S&P, which has a very steady graph through the first quarter of 2019. Foot Locker was more volatile than Nike, but not by the difference in their respective betas.
The second quarter of 2019 has told a different story for these two stocks. The S&P 500 for the past 2 ½ months has basically flatlined, maintaining the Q1 gains but doing nothing else. The economy is performing well, with low inflation and stable growth, in part because of cautious monetary policy. Nike has dipped slightly from that early April high, showing that it is somewhat more volatile than the broader market. Foot Locker, on the other hand, has seen its stock crash down to a 52-week low and then rebound only slightly. The year-to-date performance has seen Nike gain 19.37%, the S&P 500 gain 13.4%, and Foot Locker decline 9.45%. Over the past three months, that difference is even more pronounced. In the past three months since mid-March, the S&P 500 has gained 2.29%, while Nike has declined 3.87%. Foot Locker, on the other hand, has seen its stock price decline by 26.89%. The question at this point is what is happening with Foot Locker, that has seen its fortunes diverge so starkly from those of Nike. To make that determination, an analysis of each company’s financials is in order. Because the divergence is recent, the last annual reports may not shed much light and recent quarterly reports may be more insightful, but the annual reports provide a good starting point for analysis.

Nike Financial Analysis
Nike’s stability and steady growth are in evidence in its financial statements. The company recorded revenue in 2018 of $36.397 billion, up from $34.35 billion in 2017. Nike’s cost of goods sold was 56% of revenues in 2018 and 55.4% in 2017, meaning that while its margins dipped slightly they were roughly the same. The general and administrative expenses increased at a faster rate than the revenues, which would have negative impact on the net margin. The biggest factor impacting Nike in 2018 was its income tax expense, which was substantially more in that year than in prior years. The result was net income of $1.933 billion, compared with $4.24 billion in 2017.
This change in net income actually has a significant impact on the stock, because the P/E for Nike, which is fairly high, is probably higher than usual because of that lower than usual net income figure. The stock price did not react all that much to the net income decline.
Nike’s balance sheet indicates a decline in the overall size of the company. Net assets were $22.536 billion at the end of 2018, compared with $23.259 billion at the end of 2017. Current liabilities were higher, and long-term debt remained the same. Shareholders’ equity decline significantly as a result. The Nike fiscal year ends May 31st, so its 2019 fiscal year just ended.
Nike’s quarterly performance since that point has not been great either. Revenues declined in each successive quarter, even the normally lucrative holiday shopping season. In that quarter, gross profit increased, and that result trickled down through the operating profit and net income figures. That means that despite a drop in sales, Nike was able to curtail its cost of goods sold and increase its profits in that most recent quarter. This may be the reason for investor optimism, but otherwise Nike most recent financial performance seems out of line a little bit with its stock market performance.
Foot Locker Financial Analysis
Foot Locker’s fiscal year ends at the end of February. Its most recent fiscal year saw an increase in revenue, after a couple of years of stagnant revenue. This revenue boost led to an increase in gross profit, but a spike in general and administrative expense led to a lower operating income than in prior years. That said, FY19 resulted in a higher net income than the company saw in FY18.
As with Nike, Foot Locker has seen a decline in size, but its assets did not fall by much. Nevertheless, both companies are struggling to find room for growth in their industries. Foot Locker’s balance sheet is remarkably stable, however, with little change in current liabilities, long-term debt or shareholder equity over the past few years. It is easy to see why the market is skeptical about Foot Locker’s upside, but there is little reason in the financials for the pessimism of the last couple of months. To learn more about that, there must be some sort of operational news that triggered the shift in market sentiment.
Recent News
In the summer of 2018, Nike and Foot Locker entered into an agreement that market observers believed would benefit both companies. Nike would design and sell several sneakers exclusively in Foot Locker. This move came even as Nike pursues an aggressive direct-to-consumer strategy, though the move might have been made to help one of its biggest retail partners, as Foot Locker doubtless would not be happy with Nike going direct to consumer after relying on loyal channel partners for so long. The move was seen as a boost to both companies because “Foot Locker helps Nike reach a customer who wouldn’t otherwise purchase from their website” and “Foot Locker’s same store sales have a 79% strong correlation with Nike’s North American sales growth” (Jiang, 2018).
In February, 2019, Foot Locker announced another investment, this of $100 million, in the secondary sneaker market. This investment was viewed positively by the market, particularly in light of the strength of the secondary and collector sneaker market, which is a reliable source of income for manufacturers and retailers alike, and less prone to shifts in fashion. The secondary sneaker market is a high-growth industry, with an estimated size between $3 billion and $10 billion, enough to move the needle on Foot Locker’s revenues.
There was some negative sentiment surrounding Foot Locker to the extent that many mall-based businesses have been struggling the past few years, as shoppers look for other options, including online, Walmart and Costco. Specialty stores in urban areas are doing well, anecdotally, but mall-based stores are struggling. Foot Locker’s stagnant revenues support that narrative, but investors appear to have received the company’s moves into other areas of business, including the secondary market, positively, and in theory those moves should be providing Foot Locker with avenues for growth (Hensel, 2019).
The company’s decline from the early April highs was punctuated by a dip into a 52-week low in late May. That occurred after Foot Locker announced its first quarter results. Those results saw increases in both year-over-year sales, same-store sales and net income. The issue is that analysts were expecting stronger gains from the company during this period. Some of the selling was related to the stock having gained substantially in the prior 52 weeks, so that it was sitting at a relative high (if not recent high), and the fact that the company’s targets are fairly aggressive. Still, the selloff seems a bit harsh, especially when a company on track for high single digit EPS growth is trading at a multiple of 9 (Symington, 2019).
Recommendations
The recent performance of Nike, Foot Locker and the S&P 500 has been quite interesting. The S&P has been on a slow, steady increase over the past year, and stuck in a holding pattern for much of Q2. This performance essentially mirrors a strong and stable US economy, which is performing well on aggregate. There are sectors that are exceptionally strong, such as software, and other sectors that are struggling because of a quasi-trade war with China. The S&P’s performance is in line with what would expect it to have been given the state of the US economy.
Nike and Foot Locker, however, have seen interesting quirks to the performance of their stocks. They traded closely together for the first quarter of the year, then sharply diverged. Nike experienced volatility roughly in line with its three-year beta, registering a slight decline, because its performance has not been great. Despite being a rock solid company in terms of size, market share and brand equity, Nike has also seen its revenues decline, and its asset base as well. While it was able to begin curtailing costs in the final quarter of its 2019 fiscal year, it still saw a fairly steep decline in its overall equity value. A slight decline versus the S&P is perfectly reasonable.
Foot Locker’s stock traded more or less in line with Nike for the first quarter, outperforming it slightly. At the time, Foot Locker was engaged in share buybacks, which would have propped up the share values. The company also increased its dividend for the coming fiscal year, another move that should have boosted the share price – and did for a short time. However, Foot Locker’s stock has been on decline since the beginning of April. The sharp decline at the end of May when, despite improved financial performance that was on track with the company’s roadmap, the company nevertheless missed analyst estimates. Had Foot Locker run up in the weeks prior to this, a selloff might have made sense, but that is not what happened. Thus, it was probably a good time to buy as the company appears to be oversold, at least temporarily. This decline has given Foot Locker a poor performance over the second quarter of 2019, despite improved financial performance and management having a fairly coherent plan to transition the company away from dependence on a struggling mall-based business model. That said, Foot Locker’s stock has a three-year beta of 1.53, so it is fairly volatile. This volatility could relate to a relatively low number of outstanding shares, but it also has resulted in a company with a fairly low P/E ratio.
Conclusions
The differences between Nike and Foot Locker are largely reflected in the performance of their respective stocks. Nike is the larger of the two, by a factor of 50, and is more global in nature. This stability is reflected in slow, steady growth, a beta of 1.07, and its dominant market position and brand strength have compelled investors to basically give Nike the benefit of doubt during a period where its core business is struggling. Nike has therefore performed roughly in line with expectations, relative to the S&P 500.
Foot Locker, being a much smaller company, in an intensely competitive business, and with high dependence on a single supplier, that being Nike, has seen greater volatility, and investors have not given Foot Locker the benefit of the doubt in terms of its financial performance. Foot Locker’s stock has always been volatile relative to the broader market, and the response to its latest earnings is no exception. Whether or not this creates a buying opportunity probably depends on one’s perspective of management’s strategy for adding growth to the company’s business model.
All told, the exercise of comparing these two highly complementary businesses is insightful, especially in those instances where a stock performs out of line with what one might expect. Such deviations provide an opportunity to investigate the company and its stock from a variety of perspectives to try to identify what is driving the stock’s movements. The fluctuations in Foot Locker’s stock recently were not that easy to determine, but reactions to earnings can be quite extreme, at least in the initial period after an earnings announcement. The volatility typically settles down – Foot Locker has since increased a little bit off its bottom – but it is always interesting to think about what drives prices in the market because there are so many potential factors that influence stock prices.
References
Hensel, A. (2019) They realized the world changed: How Foot Locker suddenly became hot again. Digiday UK. Retrieved June 15, 2019 from https://digiday.com/retail/foot-locker-managed-turnaround/
Badenhausen, K. (2019) Foot Locker invests $100 million in secondary sneaker platform. Forbes. Retrieved June 14, 2018 from https://www.forbes.com/sites/kurtbadenhausen/2019/02/07/foot-locker-invests-100-million-in-secondary-sneaker-firm-goat/#362fbb22568d
Jiang, E. (2018) A new sneaker deal shows how important Nike is becoming to Foot Locker. Business Insider. Retrieved June 14, 2019 from https://markets.businessinsider.com/news/stocks/nike-sneakers-campaign-with-foot-locker-shows-importance-of-collaboration-2018-8-1027481268
Symington, S. (2019) Why Foot Locker stock dropped today. The Motley Fool. Retrieved June 15, 2019 from https://www.fool.com/investing/2019/05/24/why-foot-locker-stock-dropped-today.aspx
Walsh, B. (2019) Foot Locker just boosted its dividend and launched a stock buyback. Barron’s. Retrieved June 15, 2019 from https://www.barrons.com/articles/foot-locker-stock-dividend-buyback-51550769293
Yahoo! Finance (2019) Foot Locker, various pages. Retrieved June 14, 2019 from https://finance.yahoo.com/quote/FL/
Yahoo! Finance (2019) Nike, various pages. Retrieved June 14, 2019 from https://finance.yahoo.com/quote/NKE/