What happened
Shares of Designer Brands (DBI +3.15%), the parent of DSW, were sliding today on reports that it is among the retailers that Nike (NKE +0.61%) is cutting out as part of a plan to limit distribution to favor its own channels and retailers willing to give the brand an elevated experience.
Designer Brands stock was down 7.3% at the close on Wednesday on the news.
Image source: Getty Images.
So what
For several years, Nike has had a strategy of paring down undifferentiated retailers like mom-and-pop shops in order to take more control over its brand experience and focus on retailers like Foot Locker and Nordstrom willing to give the sneaker brand dedicated space and Nike-trained employees.
DSW now seems to be among the latest victims of that strategy as confirmed by a tweet from Hedgeye analyst Brian McGough, who has previously worked at Nike. McGough noted that Nike provided well below 10% of product assortment for DSW, with adidas (ADDYY +2.01%), Puma, Under Armour (UA +4.73%) (UAA +5.14%), New Balance, On, and Skechers among the brands ready to fill the void at better margins for DSW.
Last year, Nike had said it would stop selling to retailers like Zappos, Dillard's, and Belk. It's easy to see why the news is viewed as a negative for Designer Brands since Nike is the world's biggest footwear brand, and it could also be a prelude to a similar announcement by adidas and Under Armour, which are now following Nike's strategy.
Now what
Despite today's sell-off, Designer Brands shares have been surging recently, up 83% year to date as the retailer was one of the harder-hit chains in the sector during the pandemic. The retail stock has been able to recover much of those losses in anticipation of the economic reopening. In its fourth-quarter report, which came out last week, revenue fell 27%, showing the challenges it has faced during the pandemic. But management expects a resurgence this year as consumers begin buying dress and seasonal shoes again.
As McGough points out above, Nike makes up just a small percentage of DSW's sales, and the bull case for the stock rests on the economic recovery and demand for dress footwear coming back. Still, losing the world's best-known sneaker brand is not a good look for the footwear chain, especially as the underlying business is still struggling.
