Athletic Footwear: An Under Appreciated Investment Thesis

Athletic footwear sales are likely to continue growing at a strong pace in 2014 and beyond.  The industry is set to benefit from the popularity of NBA superstars and an increasingly growing trend towards a fit and active lifestyle.

Bullish on athletic footwear and apparel stocks
A study by Bidness Etc noted that basketball footwear is not only the fastest growing category within footwear, it also happens to have high margins, and those margins will only improve in 2014.  

Source: bidnessetc.com.

Nike (NYSE: NKE  ) has sold billions of dollars in Michael Jordan branded footwear as his star power has carried basketball footwear sales for decades. During Jordan's playing career, no other NBA star was able to sell shoes nearly as effectively as Jordan.

Nike's roster of current "salesmen" include Lebron James, Kobe Bryant, Kevin Durant, Chris Paul, and many others. Some of these stars have yet to fully reach the prime of their career, which bodes well for basketball shoe sales in the next few years.

Shoes with NBA star branding naturally command a higher price than other footwear. By visiting a local shoe store or browsing a selection online, investors can note that a Jordan or marquee player branded shoe costs around $140, roughly twice the price of a regular athletic shoe, and 50% more than the average high-end running style. This ability to attach a product to a star's popularity is an advantage that Nike holds over virtually every other footwear maker.

Nike shoes are collectables
Athletic footwear is becoming increasingly collectible and more popular than ever. A Morgan Stanley study has shown that the percentage of shoppers who buy 3 or more pairs of basketball shoes annually is around 22%, an increase from around 13% in 1998.

Source: Morgan Stanley Research.

Kobe Bryant recently wore the first-ever retro model from the Kobe signature line. The Nike Zoom Kobe 1 from the Kobe Prelude Pack boasts a special colorway that tributes his 81 point single game performance. In all, Nike has created eight signature shoes that will be released weekly (with Kobe 1 Prelude released on Dec. 7, 2013) leading into the KOBE 9 Elite launch.

Nike's website noted: "The collection celebrates his career accomplishments linked with art movements. This infusion of performance mixed with art paints a small picture for what's to come for the KOBE 9 Elite as it releases February 8, 2014, where colorways will reflect Bryant's inspirations."

Basketball footwear's collectability is a sign of sustainable pricing power. Each of the Kobe Prelude shoes will retail for $200.

Source: theshoegame.com.

Consumers have to buy the shoes somewhere
Foot Locker (NYSE: FL  ) could see significant upside as the athletic footwear sales cycle is stronger than many investors assume. The company's CEO Ken Hicks has successfully improved its operations, according to Fool analyst Sean Williams. Specifically, Hicks has improved inventory management and improved its marketing efforts. For example, Foot Locker marketing now emphasizes the Foot Locker brand with its "Foot Locker Approved" slogan rather than banking on Nike's appeal.

Foot Locker has always been a top destination for premium athletic footwear given its exclusive Nike offerings.  Foot Locker's best in class relationship with key vendors like Nike bodes well for the company, which is unlikely to lose exclusive arrangements with Nike.

Foot Locker is testing new store designs and brands such as its Six:02, a "fitness destination for the active, performance-minded Woman." This could create new, material opportunities for the company in the years ahead. A partnership with Nike, similar to Foot Locker's "House of Hoops" deal, could create a dedicated women-only brand that can create incremental sales.

The online risk
Amazon.com (NASDAQ: AMZN  ) is making progress in athletic apparel but is unlikely to pose much of a threat to Nike or Foot Locker in the near term. Foot Locker holds a tremendous advantage on Amazon as it is Nike's premium product channel. Nike allocates its best and highest priced exclusive products to Foot Locker, and is unlikely to switch allegiances to an online only venue like Amazon.

Foot Locker's differentiated market positions and recent efforts to improve its e-commerce investments protect it against Amazon. For example, during the company's recent conference call, management noted it's, "making significant efforts and we're doing things like buy online, reserve in-store, buy in-store, have it shipped to you, buy online, come pay cash in-store."

Naturally, a consumers option to buy online and try on a shoe in store to confirm a right fit should protect it over online competitors.

Final Foolish thoughts
We have seen over the years the pace of innovation within athletic footwear. Nike introduced the "Lunar" and "Free" technologies, and most recently launched "flyknit." These innovations have helped sustain the entire athletic category and benefited retailers such as Foot Locker that have successfully positioned themselves as a top retailer in the space.

Nike is probably the purist way to invest in the footwear space.  The company's massive balance sheet of around $5.5 billion in cash allows it to heavily invest in new and innovative products, manufacturing, and marketing, all of which should continue to drive earnings growth over the years.

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