How Foot Locker is waging a comeback after its breakup with Nike

Throughout a latest occasion celebrating Foot Locker’s fiftieth anniversary in New York Metropolis, it was onerous to think about that the legacy sneaker chain was showing on chapter watch lists as lately as March.

Grammy-nominated rapper Coi Leray was there to have fun the corporate with a particular efficiency of her hit tune “Gamers” as influencers, journalists and handpicked members of the corporate’s revamped loyalty program sipped on lavender margaritas and champagne cocktails.

Workers – and never simply these within the glare of the corporate’s PR workforce – gushed about CEO Mary Dillon as Adidas staffers celebrated the corporate’s new retailer design, which showcases individual brands as an alternative of blending them on nondescript shoe partitions. 

Foot Locker turns 50 whereas on a little bit of an upswing two years into Dillon’s tenure as CEO. Final month, it launched fiscal second-quarter outcomes and full-year steering that beat expectations, as comparable gross sales grew for the first time in six quarters.

As Foot Locker revamps its sprawling retailer footprint, and perhaps benefits from some good timing, it is making strides in profitable again its crucial model companions like Nike and Adidas, the latter of which co-hosted the Monday evening occasion and helped safe Leray’s efficiency. 

“Our final quarter was a extremely good indication that the onerous work that we have been placing into the Lace Up plan is working, and that makes me really feel actually, actually nice, as a result of I actually see the subsequent 50 years of progress for Foot Locker and our future,” Dillon informed CNBC in an interview, referencing the corporate’s turnaround plan. “I actually assume that there is layers of class progress that we are able to drive by simply making sneakers that rather more inclusive, that rather more enjoyable, that rather more straightforward to entry.”

However as Foot Locker stares down the subsequent 50 years, the corporate remains to be at a crossroads and should reply some basic questions: can it as soon as once more be the market chief in sneakers, and may it not simply survive, however thrive, as manufacturers rely much less and fewer on wholesalers?

“With the mix of extra direct to shopper from the manufacturers, the deepening of specialists like [Dick’s Sporting Goods], the incursion of JD Sports, Foot Locker nonetheless seems to be dangerous,” mentioned Neil Saunders, a retail analyst and managing director of GlobalData. “In some methods, they’re only a kind of distributor of everybody else’s merchandise.”

Dick’s has an enormous private-label enterprise and sells different classes like sporting items, whereas JD Sports activities has robust loyalty applications and a strong style enterprise, he mentioned.

“Whereas Foot Locker seems to be susceptible as a result of it simply does not have all these different strings to its bows,” mentioned Saunders. “The reality is that though they’re getting higher, there may be nonetheless this query: Do we’d like this specialist sneaker retailer?” 

Foot Locker may be traced again to the legendary retailer Frank Winfield Woolworth, whose namesake firm branched into footwear within the Nineteen Sixties and later opened the primary Foot Locker in Metropolis of Trade, California, in September 1974. 

From the start, Foot Locker was a mall retailer. Over the subsequent 20 years, it opened hundreds of shops in malls throughout the U.S. and overseas. 

By the flip of the century, it was the world’s largest retailer of athletic footwear and attire, with a 20% market share within the U.S., based on a 2002 Forbes report. It was the first place to purchase Nike sneakers and was chargeable for 26% to twenty-eight% of Nike’s whole home income. Nike accounted for greater than half of Foot Locker’s whole gross sales on the time.

“It was an easier retail world. I believe within the years that they have been initially actually experiencing robust progress, it was so simple as being within the mall, having a big mall footprint and having the correct manufacturers and so they had that footprint,” mentioned Janine Stichter, a retail analyst and managing director at BTIG, who has been protecting the retail trade since 2008. “They have been the No. 1 associate of Nike. Nike, on the time, was robust and rising, and I believe they have been actually considered as just like the vacation spot in an surroundings that was quite a bit much less aggressive.” 

When Foot Locker’s chief industrial officer, Frank Bracken, joined the corporate in 2010, the retailer’s relationship with Nike was poised to get even stronger. By the tip of the last decade, 75% of the merchandise Foot Locker bought have been from Nike.

“This was [pre-direct-to-consumer], Foot Locker was positively ‘most favored nations’ with most of our model companions at the moment, Nike was about to go on a fairly epic run alongside Jordan, and so I really joined at a extremely good time,” Bracken mentioned in an interview.

Bracken recalled how from 2012 to about 2018, Foot Locker’s inventory rose to file highs as income grew at a mid-to-high single-digit compound annual progress charge. However because the 2020s neared, the corporate obtained “complacent” and started taking its place because the market chief in sneakers “without any consideration,” mentioned Bracken. 

“[We] obtained some weak indicators about the place the trade was headed, from our companions and from competitors, after which Covid, you realize, paralyzed everyone momentarily and I believe we misplaced a while, candidly, throughout Covid,” he mentioned. “Competitors used it as a chance to spend money on know-how and functionality and the enterprise, and perhaps we in all probability stood a bit of bit too nonetheless at that time limit.” 

As shoppers moved on-line and away from malls, Foot Locker did too little to replace its e-commerce capabilities and its actual property footprint, mentioned Bracken. On the identical time, rivals have been getting greater and savvier, adjusting their actual property methods as malls throughout America sputtered and died. 

In North America, the corporate let its banners — Foot Locker, Footaction and Champs Sports activities — overlap too closely with one another by way of assortment, location and advertising and marketing, and types “began to be aware of that,” mentioned Bracken.

On the finish of 2021, Foot Locker was winding down its Footaction enterprise and had acquired WSS – an off-mall athletic attire retailer that caters to the Hispanic neighborhood – to assist differentiate itself from rivals.

However by then, it was too late.

Nike, finishing up a brand new technique to chop off wholesalers and sell directly to consumers via its personal web sites and shops, had began reducing the number of sneakers it was promoting to Foot Locker, the corporate mentioned on an earnings name in February 2022. It selected as an alternative to order its greatest merchandise for Foot Locker’s major rivals: Dick’s and JD Sports activities. 

For a corporation that relied virtually completely on Nike, the change was devastating and posed an existential menace. By the tip of fiscal 2022, comparable gross sales had fallen 7.2% in North America. The declines would solely mount within the quarters to return. 

When Dillon, the previous CEO of Ulta Beauty, took the helm of Foot Locker in September 2022, Wall Road breathed a collective sigh of reduction. Extremely regarded amongst friends, Dillon was identified for her means to win over manufacturers, and appeared to have the mandatory chops to show Foot Locker round. 

“In a means, she soothed traders … they know that she will ship and so they know that she understands retail and the sector and he or she’s obtained good operation management and all the remainder of it,” mentioned Saunders from GlobalData. “That is clearly beginning to come via a bit of bit extra now.”

In her first main public occasion as CEO, Dillon hosted an investor day final March the place she touted a revitalized relationship with Nike. She pledged the “fruits of our renewed dedication to at least one one other” would start to point out up in outcomes by the tip of the 12 months. 

She outlined her Lace Up turnaround technique, which centered on 4 key pillars: higher advertising and marketing, a brand new actual property plan, a revamped loyalty program and an emphasis on on-line gross sales. 

However because the 12 months wore on, the macroeconomic image worsened, which hit Foot Locker onerous as a result of about half of its prospects are thought-about low revenue. The corporate went on to chop its steering twice, droop its dividend and delay a key financial target that it outlined at its investor day. 

“As a CEO, it is onerous to exit and make a dedication and have to vary it, however as a result of I consider a lot within the plan and the place we’re heading, I felt assured that it was the correct factor to do,” mentioned Dillon. “Now I consider we have form of labored previous that.”

Past the macro scenario, the corporate possible underestimated the challenges it was dealing with, and the way a lot the Nike breakup would harm its enterprise, Saunders and Stichter mentioned. 

“You do not actually know till you do it how impactful that is going to be and I believe that they thought they’d be capable of offset extra of that loss extra shortly,” mentioned Stichter. 

Whereas Foot Locker’s fiscal 2023 turned out worse than it initially anticipated, the corporate is seeing a few of its turnaround efforts begin to take maintain. Whereas Nike remains to be its largest associate, it is focusing extra on different manufacturers, corresponding to upstarts like Hoka and On and legacy incumbents like Birkenstock and Ugg.  

On-line gross sales are rising. Foot Locker plans to relaunch its cell app on the finish of the 12 months, and it lately unveiled its revamped loyalty program FLX, which permits prospects to earn reductions, entry to product launches and perks like free returns. 

“We all know that we solely seize a fraction of this annual sneaker spend that our current prospects spend on sneakers,” mentioned Kim Waldmann, Foot Locker’s chief buyer officer. “[FLX] is not essentially about getting you to purchase 10 extra sneakers per 12 months, it is a chance for us to drive share of pockets consolidation by the truth that you are getting worth again in buying with us.” 

When Waldmann began within the position final 12 months, she realized from shopper analysis that prospects beloved gaining access to all kinds of manufacturers at Foot Locker’s shops and loved the product data that its workers, referred to as “Stripers,” had. 

“The factor that they needed to see extra from us is like we’re simply not high of thoughts. Loads of shoppers simply hadn’t seen us shortly,” mentioned Waldmann. “And I believe that was actually the chance to take what’s an iconic model and make it influential and high of thoughts once more, and that is actually the work that we have been doing.” 

The corporate is advertising and marketing extra towards girls and has partnered with stars corresponding to Leray, who was a part of Foot Locker’s spring type and development marketing campaign. 

Maybe most critically, Foot Locker is lastly doing the work essential to overhaul its aging store fleet, which is chargeable for about 80% of its gross sales. Since Dillon took over, she’s closed round 500 shops, opened about 200 new retailers and transformed or relocated one other 200 or so doorways. Earlier this 12 months, Foot Locker unveiled its “reimagined” store concept and its plans to maneuver away from its conventional format, which tends to be two partitions of sneakers with a center part used for making an attempt on sneakers. 

As an increasing number of manufacturers move away from wholesalers in favor of their very own shops and web site, the technique change was crucial to Foot Locker’s survival. Its enterprise doesn’t work if it does not have the help of its model companions, which need to be sure that their assortments are showcased individually – not blended along with rivals. 

“If you speak to an organization like On they’re like, yeah, we’re selective about who we promote to, we do not need to be simply one other shoe on the wall,” mentioned Stichter. “They’re actually investing behind placing extra signage and simply investing within the shows … that is what makes the manufacturers need to work with them.” 

Since Could, Foot Locker has introduced the brand new design idea to at the least 80 of its shops, which it says have higher comparable gross sales and margins in contrast with the stability of the chain. The corporate is working to refresh two-thirds of its world Foot Locker and Youngsters Foot Locker doorways by the tip of 2025, and mentioned 40% of its North American footprint is now off-mall. 

The brand new retailer strategy could not come at a greater time for Foot Locker. Over the past 12 months, Nike has begun to stroll again its direct promoting technique after acknowledging that it went too far in reducing out wholesalers. 

“Nike is our largest associate and so they’re the most important within the trade so for us, it is also about, how will we be sure that we have now a extremely terrific long-term progress relationship with Nike? And I am proud about the truth that we’re going again to progress [with Nike] beginning within the fourth quarter of this 12 months,” mentioned Dillon. “Additionally … on the identical time, Nike has been very public concerning the position of shops and the significance of that for them as nicely so perhaps it was good timing, proper?” 

As Foot Locker seems to be forward to the subsequent 50 years, its means to outlive remains to be up for debate. Nike is at a low point and is cozying again as much as the wholesale companions, however when it rebounds, will it lower off these retailers as soon as once more? 

Absent a strong private-label enterprise, Foot Locker’s success can also be extremely depending on the efficiency of its model companions, which leaves it with much less management over its personal future than different retailers which have lately made big comebacks, corresponding to Abercrombie & Fitch. 

If Nike has a serious product launch, it may be a boon for Foot Locker’s gross sales, but when innovation dries up, Foot Locker will undergo. It has discovered itself in an identical quandary dealing with different multi-brand retailers, corresponding to Macy’s, which has additionally struggled to find itself in a post-mall world. 

When requested if Foot Locker can survive one other 50 years, GlobalData’s Saunders mentioned the corporate is the “most susceptible to extinction” of its friends. Stichter disagreed. 

“One factor we have realized is that buyers actually do need a multi-brand expertise. There are individuals who go to Nike.com or Adidas.com however individuals actually like having that choice, having the service,” mentioned Stichter. “So there’s a cause for an idea like Foot Locker to exist. I believe all of it simply relies on, can they execute nicely and be one of many most well-liked locations for shoppers who’re searching for selection.”