Footwear retail stocks, such as Foot Locker and Finish Line, have come under pressure recently due to ongoing concerns of a slowdown in athletic footwear and basketball shoes sales.
In a report published Friday, Paul Trussell of Deutsche Bank argued that concerns over a slowdown are overblown. The analyst acknowledged that while an increased emphasis on DTC (direct to consumer) by vendor partners, heightened inventories and poor results from Skechers USA Inc SKX are all valid concerns and "warranted," they are "not new."
Trussell continued that athletic footwear sales have been "robust," given their overall mid-single digit growth over the past few years. In fact, total athletic footwear sales are higher by 5.7 percent year-over-year for the last 13 weeks and up 6.9 percent year-to-date – an improvement from the 2.8 percent growth the segment saw in 2014.
Trussell added that while basketball sales have slowed (25 percent of the overall athletic footwear sales), casual athletic (20 percent of the mix) has actually gained momentum with sales up 18.2 percent year-over-year in the third quarter (versus down 4.3 percent in the fourth quarter last year). Meanwhile, running and basketball shoe sales are still "positively contributing."
Nike And Under Armour's Growth Targets Favor Retailers
Trussell pointed out that Foot Locker has generated a larger percent of Nike Inc NKE's global sales over the past few years, while Finish Line has maintained its share. As such, the analyst suggested that both retailers should grow at least by a mid-single percentage point (in-line with Nike's projected North American wholesale growth). The growth profile "translates into a nice comp lift" of 300 to 400 basis points given the fact that Nike represented 73 percent of revenue at each retailer in fiscal 2014.
At the same time, Under Armour Inc UA provided a growth target for its footwear category, which implies a 39.8 percent compounded annual growth rate over the next four years. Even though Under Armour represents a small percentage of revenue at Foot Locker and Finish Line, the "robust" growth rate could provide approximately 100 basis points to comps for both retailers over the coming years.
Bottom line, Trussell argued that sector wide concerns are "overblown," as vendors such as Nike and Under Armour "clearly have strong growth plans" with their retail partners.
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