Back to top

Will Sports Retail Stocks Survive the Direct-to-Consumer Revolution?

Read MoreHide Full Article

Athletic apparel retailers face many challenges in the competitive apparel space, but the greatest threat might be from the brands that are sold inside of their very own stores.

Industry leaders Nike (NKE - Free Report) , Adidas (ADDYY - Free Report) , and Under Armour (UAA - Free Report) are increasingly selling directly to their consumers and taking away business from retailers.

Last year, Nike announced the Consumer Direct Offense, which stated the company’s new focus on serving consumers personally. Under Armour has also been boosting its own DTC business by enhancing its e-commerce platform and opening more stores.

According to Morgan Stanley, this isn’t good news for retailers. Analyst Lauren Cassel recently picked brands over their retail partners, stating, “We also prefer to own the brands that drive innovation in the category and are experiencing a sales and margin lift from DTC growth vs. those who simply curate other people’s goods.”

More specifically, Nike’s e-commerce push comes at the direct expense of Foot Locker (FL - Free Report) , the brand’s largest retail partner. Nike products represent 67 percent of Foot Locker’s merchandise, but the brand’s return to growth might not translate to its retail partner, Cassel said.

Perhaps affected by Nike’s initiative, Foot Locker stock has been mainly stagnant over the past 12 months, dropping by over 3%. Another athletic apparel retailer, Dick’s Sporting Goods (DKS - Free Report) , hasn’t fared too well either. Shares of Dick’s have fallen by about 9%.

These results seem to be somewhat unique to the retailers in the athletic apparel industry. In comparison, the Nonfood Retail-Wholesale market has had an average return of 33.2% in the last year.

Not All Bad News

Although analysts are siding with brands and price performance hasn’t been the best lately for Foot Locker or Dick’s, there are still reasons to be optimistic.

To start, the two retailers were both able to impressively beat Zacks Consensus Estimates for earnings and sales in the first-quarter of fiscal 2018. Dick’s had an EPS surprise of 40.8%, while Foot Locker’s was 16%.

… But how?

For Dick’s, the answer is in the growth of its own private brands and different products driving sales. In the last reported quarter, the businesses that performed the best were fitness equipment and team sports. The company has a unique strategy of offering exclusively branded merchandise through licensing deals.

Further, the company’s private brands reported double-digit year over year growth. An example of one of these brands sold exclusively at Dick’s is CALIA, a fitness brand from country singer Carrie Underwood.

Foot Locker is even more dependent on big name brands than Dick’s, but it has also been able to find catalysts for growth. The company is trying to improve performance through operational and financial initiatives aimed at developing digital competencies and supply chain effectiveness.

In February, Foot Locker revealed a capital expenditure program of $230 million for 2018. Its digital endeavors include improving its e-commerce platforms, implementing new sales software, and expanding its data analytics capabilities. Apart from these, Foot Locker plans to spend capital on revamping its stores and exploring off-mall retail formats.

Bottom Line

Brands like Nike switching to more DTC methods of selling doesn’t bode well at all for Dick’s, Foot Locker, or any other traditional retailers in the sports industry. Chains like Sports Authority and Sport Chalet have already gone out of business in recent years.

However, there is still hope. Both Dick’s and Foot Locker are fighting back with new initiatives and improving their own companies, reducing their reliance on brands. These two athletic apparel retailers can find competitive advantages, like licensing or digital capabilities, to create a niche in the crowded market. It will be difficult to thrive, but it isn’t over quite yet.

Looking for Stocks with Skyrocketing Upside?

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot trades we're targeting>>



More from Zacks Stocks in the News

You May Like