Share prices of Foot Locker (FL -0.69%) were pummeled recently after the company announced fourth-quarter results that failed to meet Wall Street's expectations. The retailing chain announced solid sales growth for the holiday season and for the full 2021 year, but costs are rising.
Foot Locker management said the company might stumble in its race to diversify its business, too, as it starts to lose access to products from Nike (NKE -0.36%), its biggest supplier. Let's take a closer look.
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Solid earnings results
Foot Locker closed out a good fiscal 2021 in an impressive fashion. Comparable-store sales were up even compared to booming results a year earlier. Overall revenue rose 7%, thanks in part to new acquisitions the company made in recent quarters. "We closed out a record year by delivering solid fourth-quarter results that reflect the ... momentum we have built in our business," CEO Richard Johnson said in a press release.
The retailer is facing supply chain issues like all of its peers. However, rising prices and high demand for premium footwear and apparel offset that pressure. Gross profit margin held steady at above 34% of sales, a high for the business. Adjusted net income jumped 177% for the full year.
The Nike problem
Management stressed the company's accelerating diversification efforts in the announcement, and it's clear that this initiative has now taken on a new urgency.
Foot Locker warned that Nike, its biggest supplier, will be dramatically curtailing the volume of products it sells through its partnership. Nike's merchandise is expected to represent about 55% of overall Foot Locker's sales by late 2022, down from its more traditional spot at over 70%.
It's no surprise, given that Nike has been focusing more on its direct-to-consumer business for several years. The footwear giant enjoys much higher profitability when it sells straight to its customers, and that relationship tends to promote more shopper loyalty. It makes sense that Nike would do what it could to shift more demand toward the selling channels that it owns.
What shocked investors is that Nike is moving quickly to make itself the only place that fans can go to purchase popular athletic shoes and apparel. Rather than allowing demand to continue steadily shifting toward its digital channel, the company is forcing a quicker break.
Looking ahead
That move might turn off a few Nike fans since they'll have fewer shopping options. It will be harder to find deals, too, outside of Nike's own outlet retailing locations.
For Foot Locker, the move means intense pressure on the sales footprint this year. Comparable-store sales should fall by as much as 10%, management warned.
Foot Locker sells much more than just Nike products. It is increasingly launching its own athleisure brands and has been busy purchasing companies like WSS and atmos to fill out its own omnichannel selling strategy.
These moves likely helped cushion the blow from losing some access to Nike products in late 2021. But Foot Locker can't avoid at least a temporary sales decline as its biggest partner takes a different path to reach its footwear fans directly. That's why investors should be cautious about starting any new position with the retailer. A key part of its business model is fading, and there's no clear replacement on the way.
