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: Foot Locker shares plunge as Nike continues shift away from wholesale to sell more of its own gear

Foot Locker Inc.’s stock plunged 31.5% on Friday as the athletic retailer unveiled a merchandise plan that includes less Nike Inc. gear.

Nike’s
NKE,
+0.96%

multi-year business strategy includes an ongoing shift to more direct-to-consumer sales, which means fewer items will be available at wholesale retailers like Foot Locker
FL,
-31.13%
.

Foot Locker, which reported fourth-quarter earnings and sales that beat Street expectations, discussed in detail the coming shift in its merchandise mix, which includes more Reebok, Puma and exclusives. No vendor is expected to represent more than 60% of total purchases for fiscal 2022, down from 70% in 2021 and 75% in 2020.

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Foot Locker Chief Executive Richard Johnson said on the earnings call that the new merchandise strategy is already seeing success.

“While we seek to provide more variety, our largest vendor is accelerating its DTC strategy,” he said, according to a FactSet transcript.

“We expect their concentration to decline meaningfully in the fourth quarter this year to a level that will continue into 2023. We continue to have a strong relationship with Nike, and they remain an important partner for our business, especially in basketball, kids and sneaker culture, where we have an unrivaled connection with our consumer.”

The changing nature of the two companies’ relationship is cause for concern from investors and analysts.

“Being a ‘strategic partner’ doesn’t mean as much as it used to,” wrote Wedbush in a note.

“For years, the bear thesis on Foot Locker was predicated on Nike de-emphasizing them due to their own DTC ambitions, but Foot Locker had continued to grow with Nike due to its position as a ‘strategic partner.’ But that all seems to be changing now.”

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The shift is bad news for Foot Locker, Wedbush says.

“We don’t really see a silver lining here,” analysts led by Tom Nikic wrote.

“We always thought that Foot Locker’s position as a ‘strategic partner’ would insulate them somewhat from Nike’s DTC push (as Nike has often spoke to a need to address demand in brick-and-mortar and multi-brand channels), but this is a dramatic change in the Nike-Foot Locker relationship.”

Wedbush rates Foot Locker stock at neutral and cut its 12-month price target to $33 from $48.

Foot Locker’s Johnson maintained an optimistic tone on the earnings call, highlighting the advantages of greater diversity in its merchandise.

The company is also moving to bigger stores away from malls and focused on a “more locally relevant product assortment.” A “home field” store coming to South Florida will offer perks like training zones and a focus on wellness.

And a new cost saving program is expected to yield $200 million in annualized savings.

Still, analysts came back to Nike and how its increased scarcity on Foot Locker’s shelves will hurt the business.

“[T]oday’s update is likely to fuel longer-held investor concerns about Foot Locker’s extremely concentrated exposure to Nike which has been emphasizing its own DTC channels and has announced strategic relationships with others,” wrote Baird in a note.

Nike announced a partnership with Dick’s Sporting Goods Inc.
DKS,
+1.30%

in November 2021 for the digital rewards program.

Baird rates Foot Locker stock at neutral with a $56 price target.

Foot Locker stock has tumbled 46.2% over the past year while the S&P 500 index
SPX,
+1.93%

has gained 14.1% for the period.

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