Nike vs. Foot Locker: Financial Comparison and Stock Analysis

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 both are heavily engaged in marketing and therefore share a similarity in terms of reaching the same customer base. Nike has long been a key supplier to Foot Locker, and Foot Locker a vital retail partner for Nike. Nike accounts for around 70% of Foot Locker's business (Jiang, 2018). Because these companies do different things but serve 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 are the financial metrics, which tell the story of how large each company is and what the current state of their business is. The valuation of each company is heavily influenced by how their business is performing. But valuation also has a future-facing aspect that must be taken into consideration. Further, there are operational differences, given that they are in different businesses. Nike sells globally, for example, while Foot Locker has more of a North American focus.

Stock Market Performance: Nike vs. Foot Locker

According to Yahoo! Finance, Nike has a stock price of $83.44 and a market cap of $131.147 billion. This price is not far from Nike's 52-week high of $90.00, and well above the 52-week low of $66.53. This range is relatively narrow, consistent with a market that has traded in a fairly tight band of late. The 52-week high occurred in April and represented the highest point for the stock in the prior 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 trading range would have suggested low volatility. In general, Nike operates in a mature market that it has largely saturated, leaving only limited room for growth without stealing share from smaller competitors.

Nike has earnings per share of $2.57, giving the company a price-to-earnings (P/E) ratio of 32.50. This P/E ratio is consistent with a firm for which the market is forecasting moderate growth. It reflects Nike's fundamental strength as a company, which allows it to continue expanding even if it must do so slowly. Some recent ventures, including an exclusive shoe line for Foot Locker, have helped investors maintain optimism about Nike stock.

According to Yahoo! Finance, Foot Locker's price is $43.12 per share, giving 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 well below the stock's 52-week high of $68.00. The company reached that high at the beginning of April — the same time Nike did — but Foot Locker's stock fell significantly from that point, hitting a 52-week low by the end of May in just two months. A slight rebound has occurred since then.

Foot Locker stock has a beta of 1.53, indicating much higher volatility than the general market. The reason for this elevated volatility is not immediately obvious, given that its industry is roughly the same as Nike's. Foot Locker is a much smaller company and, while it is very large relative to many competitors, it is not dominant in the way Nike is. Major retailers capable of undercutting Foot Locker on price make the competitive environment considerably harsher for Foot Locker than for Nike.

Foot Locker has earnings per share of $4.79, giving it a current P/E ratio of 9.01. That is a fairly low multiple, indicating that the market does not see significant upside in Foot Locker's business. The recent sharp drop in the company's stock price affects the P/E ratio, and that drop must have been caused by some factor that reduced investor confidence in Foot Locker's growth prospects. Further research is required to fully understand the current dynamics of Foot Locker's stock.

Nike is a much larger company than Foot Locker, and that influences how the market perceives each 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 reasonably perceives Nike as having a fairly stable income stream. The company also has sufficient resources to build new markets for its brand, even as its existing markets enter maturity. Thus, the market has awarded Nike stock a healthy valuation, with the stock currently trading near its 52-week high.

By contrast, Foot Locker is considered significantly riskier. It is a mid-sized specialty retailer with high dependence on a single supplier. Where Foot Locker needs Nike, Nike does not necessarily need Foot Locker to the same degree. The market views Foot Locker's business as more vulnerable to outside threats, and therefore assigns it low expectations for future growth — reflected in the low multiple — along with much higher than average volatility. In many cases, a smaller company or one with a more precarious market position will experience higher volatility.

Comparing Both Stocks Against the S&P 500

Using the comparison chart function in Yahoo! Finance, the performance of both stocks can be benchmarked against the broader market, represented here by the S&P 500. While Nike might be compared to the Dow, Foot Locker's size makes the S&P a better fit, and the S&P 500 is also a far 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 through the beginning of April appeared tied to general sentiment about the athletic footwear and apparel business, and both peaked around the same time in the first week of April. The S&P 500 over the same period was also rising, but much more slowly, reflecting a general upswing driven by relatively solid economic performance. The difference in volatility between Nike and Foot Locker was not particularly apparent during this period, and both seemed more volatile than the S&P 500, which moved steadily through the first quarter of 2019.

The second quarter of 2019 told a different story. The S&P 500 essentially flatlined over the past two and a half months, holding onto its Q1 gains without advancing further. Low inflation and stable growth, supported by cautious monetary policy, kept the broader economy on solid footing. Nike dipped slightly from its early April high, consistent with its above-market beta. Foot Locker, on the other hand, crashed to a 52-week low before recovering only modestly.

Year-to-date, Nike gained 19.37%, the S&P 500 gained 13.4%, and Foot Locker declined 9.45%. Over the prior three months, that divergence is even more pronounced: the S&P 500 gained 2.29%, Nike declined 3.87%, and Foot Locker declined 26.89%. The central question is what is driving Foot Locker's fortunes to diverge so sharply from those of Nike. An analysis of each company's financials is therefore warranted. Because the divergence is recent, the most recent quarterly reports may be more insightful than the last annual reports, but the annual reports provide a solid starting point.