News that Mary Dillon is taking over as Foot Locker's (FL -0.69%) new CEO propelled the stock to a 20% gain on Friday. Shares of the footwear retailer are now up 60% from their 52-week low, and the market seems enthusiastic about the former Ulta Beauty (NASDAQ: ULTA) CEO taking the reins.
But Dillon will have some major challenges to contend with -- let's look at them.
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Escaping the mall
Foot Locker is heavily associated with shopping malls, and that's been a drag on the stock for years. Investors have long since recognized that e-commerce and direct-to-consumer sales channels are eating malls' proverbial lunch. The COVID-19 pandemic and the lockdowns and social distancing efforts that it triggered only served to accelerate the shift in consumer behavior away from in-person shopping.
One of Dillon's highest priorities will doubtlessly be to expand Foot Locker's online presence, but that will be familiar labor for her. When she took the reins of Ulta in 2014, e-commerce provided just 4% of the retailer's revenue. By the end of her tenure in 2021, the company was an omnichannel powerhouse and e-commerce accounted for 30% of sales.
Dillon is a strong choice for this job because she recognizes the importance of taking a holistic, omnichannel approach. While she expanded Ulta's online sales, she didn't neglect its physical stores. During her tenure, the company doubled its location count, built out a strong loyalty program, and revamped the in-store experience by adding features that got customers excited to walk through Ulta's doors again, such as a skincare bar with services like 10-minute express facials and 20-minute mineral infusions.
Consumers can buy most things online nowadays, so the key to getting more people into the stores is to make the trip a fun experience or an event, rather than just a necessity. If Dillon can somehow bring a similar type of fun, experiential dynamic to Foot Locker's physical stores, in addition to improving its e-commerce offerings, it will benefit shareholders.
Prior to Dillon's hiring, the chain had already been trying to diversify away from the mall. It acquired two smaller chains, WSS and Atmos, in 2021 in an effort to gain more off-mall exposure.
The swoosh-logoed elephant in the room
Beyond the typical challenges that face all brick-and-mortar retailers, Foot Locker must find a solution for one massive, company-specific issue; Nike (NKE -0.36%) products make up about 70% of its supplier purchases. Such reliance on a single vendor can be problematic for any company. But it's even more of a risk when that supplier is aggressively expanding its own direct-to-consumer channels -- as Nike has been.
Foot Locker is already trying to navigate through this challenge. For one thing, management has said that in future years, no one vendor will make up more than 60% of its annual merchandise purchases. That's still a large concentration, but it would be progress. Its acquisitions of WSS and Atmos should also help. And the retailer offers products from in-demand brands like Adidas (OTC: ADDYY), New Balance, On (NYSE: ONON), and Crocs (NASDAQ: CROX), so Dillon has options.
Also, there's another way to look at Foot Locker's relationship with Nike. Over the last several years, the footwear and athletic apparel giant has cut off plenty of sales partners, among them Big 5 Sporting Goods, Urban Outfitters, Dillard's, and even Amazon (NASDAQ: AMZN). After all that, its relationship with Foot Locker continues. Any time a company outlasts e-commerce juggernaut Amazon in some way, it deserves some credit.
Foot Locker is Nike's largest partner, accounting for 24% of Nike's North American wholesale revenue in 2021. Perhaps this indicates that Nike views Foot Locker as a valuable partner -- or at the very least, a necessary evil.
Wall Street has taken notice
Dillon's hire certainly got Wall Street's attention. Bank of America analyst Lorraine Hutchison praised the choice, citing her track record at Ulta while acknowledging the challenges she will face. Hutchison also upgraded the stock from underperform to neutral and raised her price target to $43.
"While at the helm at Ulta, Dillon engineered a best-in-class loyalty program, revenue increased at a 16% CAGR, and the stock tripled," Hutchison wrote. "While we are encouraged by this announcement, we still think FL faces secular challenges as a mall based retailer and has an uphill journey replacing NKE's reduced allocation."
Meanwhile, Morgan Stanley also boosted Foot Locker from underweight to equal weight and raised its price target from $24 to $36. Citigroup, JP Morgan, and Barclays all upgraded the stock from sell-equivalent ratings to hold equivalents.
Is Foot Locker a buy?
Foot Locker's challenges already seem to be priced into the stock, which presents an opportunity for investors. Even after their strong summer rally, the shares still look inexpensive from a valuation standpoint, trading at just under 5 times earnings. Furthermore, the company pays a dividend that at the current stock price yields north of 4%.
Dillon has her work cut out for her, but if she can deliver the same type of success that she did at Ulta, Foot Locker should become another long-term winner for shareholders.
