December 20th Nike held it’s Fiscal Year 1Q 2017 conference call and report and as I’ve been discussing for a few years when I began seeing the disappearance of mom and pop accounts, they pushed off the worst year on the stock market they’ve ever had by leaning heavily on their path to DTC. Their conference call finally made clear to Wall Street that Futures were no longer the catalyst for growth. This reignited confidence in the brand and for the first time all year Nike is trending up on the market. I don’t see it slowing down as the brand doubles down on releases like the Hyperadapt and their “Express Lane” feature to streamline the release of footwear as they did with the Lunarcharge.
What does this mean for the market overall. I see Nike as a California styled company. What I mean by that is California is typically the first state to implement ‘certain’ changes. After that other states follow. Nike’s ability to adapt to the market by focusing on DTC keeps them in line with their growth being similar to a start-up even after 50 years. If Nike with their size can pivot, smaller companies should be able to follow suit and I know they will. Which means Nike wins, brands follow, but who loses?
This is Part 3 on the companies who will lose due to Nike’s rebound.
Retail Stores Not Named in the Conference Call
During the conference call for Fiscal 1Q 2017 Nike mentioned having great relationships with two wholesale accounts, Foot Locker and Dick’s Sporting Goods. They didn’t mention Jimmy Jazz, City Gear, DTLR, Hibbett Sports, or (insert a chain you can think of). They mentioned DSG and FTL. They didn’t mention Finish Line. This could be seen as an oversight, but I don’t think many people realize just how many brick and mortar stores Nike has. Behind FTL, Nike is the second biggest retail outlet for Nike gear. With over 900 stores it becomes apparent that Nike has to figure out a way to feed the beast.
Full disclosure, I witnessed the slow decimation of a growing chain over the last 6 years. I didn’t work for the company. The company worked through me. As a middle man I moved a lot of shoes for the company and had full access to the storerooms and inventory. My primary job as a consultant was to help the company meet payroll when sales slowed. I was also meant to clear out inventory via my channels. Here is what happened. The store had one primary location for over 10 years. They added Nike and began growing. With 7 stores the dough was rolling in. About 5 years ago, they were told to redesign the stores in order to maintain their Jordan Brand account. These renovations cost the stores 100K each. The inside of the stores looked like Nike. There were gigantic murals of LeBron and Jordan. By doing this the store was able to maintain their JB account and add Nike Basketball. They basically moved up a tier which was good. About 3 years ago, Nike increased the wholesale cost 5%. Wholesale wasn’t really 50% of retail it totaled to about 55% after shipping. Nike also began to require payment monthly instead of quarterly. Nike Basketball was dead for the store chain and they still had to get Retro Jordans because those were guaranteed to sell out. The bills were coming in fast. If the store didn’t pay on time, they would miss the next big retro release. Jordan Brand also increased the number of Brand Jordan shoes the company had to take on to get Retros. Then Jordan Brand required the chain to take on more apparel to match the Retro releases. The Apparel stalled as the market was urban and they didn’t really wear sportswear and Jordan apparel like that. About 2 years ago, I was literally ‘consulting’ to meet payroll for the company. 2 locations closed. Long story short, at the end of 2015 the chain sold to a bigger chain. Sound familiar? This is a micro version of what happened with The Sports Authority. People won’t say that it is, but when the TSA closed they owed Nike 46 Million dollars.
About a year ago Finish Line had stores on the chopping block. This week Finish Line saw their stock drop to 19/share from 24/share after they had been growing all year. Hibbett Sports saw a bigger decline from 45/share in November to 36/share today (12/23). Hibbetts is also rated as a sell now.
When Nike wins all retail outlets that sell the brand are in jeopardy. It only stands to reason that retail outlets who have made themselves primarily Nike affiliates (City Gear, Jimmy Jazz, etc.) are going to feel the pinch as Adidas continues to grow and Under Armour figures things out.
Ultimately my thoughts that retail outlets will stumble is based on my own business. I run an e-commerce store. This store utilizes a variety of selling strategies, but I know first hand how difficult it is to move shoppers from those third party platforms to a brand’s website. All of the stores mentioned not named FootLocker and DSG are not focusing on a multichannel strategy. Finish Line is not doing bad with e-commerce, but the driver of traffic to retail is going to be customer service and customer experience. Most important the driver is going to be personalization. Digital is being integrated and most of the retail outlets are doing a poor job of building digital platforms that will drive traffic from online into stores. Hibbetts only recently began building their online retail business, but they still have some of the worst merchandising in retail.
My prediction for this year is that small-big chains (private companies) like City Gear, Jimmy Jazz, Sheikh, DTLR will struggle. Jimmy Jazz has a solid grasp of social and online so they may be okay, but this year will see private chains and larger chains struggle. I spoke with a Nike Employee yesterday and they said they are expected ship 30,000 pair of shoes per day. That’s going to hit somebody and that somebody wasn’t mentioned in the call on Tuesday.