Over the past year and some, we have written about how the escalating competition between premium athletic brands was shifting the industry’s focus from strictly direct-to-consumer (DTC) to re-embracing wholesale partners, be it Dick’s Sporting Goods, Nordstrom, Hibbett Sports, Scheels Sporting Goods, Foot Locker, and the local performance running specialists. Other notable developments over the year include another year of large market share gains by HOKA and On Running--which was in the wholesale channel--and the Adidas and Yeezy split (and the resulting change in leadership and brand/business strategy). All of this has convoluted into the industry still having a glut of inventory--one year after that glut was widely recognized and unprecedented amounts of clearance activity ensued--which has resulted in a large pull-forward of demand over the trailing-twelve-month period creating an air pocket for the next twelve months. And so “air pocket against an elevated base” is why Foot Locker reported a large earnings miss and guide down this week (sending its stock price down 25%). Below, we will talk about a few of the brands that have reported recently in order to frame up a following discussion of Foot Locker.
On
On reported +78% revenue growth year-over-year during Q1 2023 (including 92% growth in the U.S.) and raised its full-year revenue growth outlook to +42% growth based upon strong than expected wholesale orders for 2H 2023. Using rough averages, the guidance equates to $1B of wholesale equivalent revenue in the U.S. and selling 14.3M pairs of shoes, up from 10.6M last year. (On’s business is principally wholesale. They do sell apparel, but it’s only 4% of the sales mix.) Co-Founder Caspar Coppetti shared, “We are very satisfied to see that On's…strategy of winning races and converting everyday runners to On is delivering strong results. To illustrate, the Cloudsurfer, Cloud Monster, Cloud Runner, and Cloud Go, four running products that were only launched within the last 12 months are now making up 45% of On sales at the leading U.S. running store.” Co-CEO Martin Hoffmann stated, “On products are now available in almost 9,800 doors [globally]. This includes the now 58 doors that we have at Dick's Sporting Goods, a partnership that we are incredibly happy with and it plays an important part in expanding our reach to new customers… [And] those 58 stores have the highest average sell-through of all wholesale doors.”
adidas
Adidas' North American first-quarter revenue fell 20%, with sizable declines in sportswear and Yeezy product. For the year, Adidas continues to expect to report a EUR 700M loss, including EUR 500M in Yeezy product. Pre-pandemic, the business produced profits of around EUR 2.4B. There are no expectations for the business to return to that level in the near- to medium-term.
Unfortunately for Adidas, inventories remain far too high with turns for the quarter of only 2.0X vs. 3.2X when it was in better fitness. CEO Bjorn Gulden stated, “The inventory issues in U.S. are bigger than...normalized [in the near term], and the reason being that the inventory level, we are now channeling most of the excess inventory through our direct-to-consumer (D2C) channel. That means that our factory outlets, for example, which normally should have fresh merchandise also coming directly out of factories is now being only serviced by clearance, which again takes your margin down. And there isn't any way right now to clear excess merchandise through channels that you normally do. The value channel with T.J. Maxx's and Ross Stores' are also full. So that's why our approach is to do this over 3-4 quarters and not try to flush it in one quarter because it won't help because it will come back again." These challenges create an opening in the market that On Running and Lululemon seek to fill, and it allows for an easier path for Nike to get itself back on stride after its own inventory glut.
Under Armour
Like adidas, Under Armour has a new CEO (Stephanie Linnartz, formerly with Marriott), and last week’s Q1 2023 update call was her first in the role. Her assessment of Under Armour was, “We are not pulling in our fair share of market growth. I believe a causal factor here is the inconsistency of how the Under Armour brand shows up across our regions, with the most significant opportunity to improve in the United States…In the U.S., there is no question that athletes love the Under Armour brand. And while our consumer insights tell us that we have tremendous brand awareness there is also a high level of latent brand equity. Latent because consumers are aware and engaged, yet conversion is more dormant than it should be. I attribute this state to inconsistent execution across our product, marketing, and retail efforts. From aligning products to be premium at every price point, to disciplined channel segmentation to more consistent product marketing. There is a significant opportunity to activate more simply across the dimensions that matter and drive improved brand affinity…From both the global and U.S. perspectives, we're assessing how our products, athletes, and marketing strategies are or are not breaking through to reach our target consumers. From brand activations to a roster that includes Stephen Curry, Justin Jefferson, Jordan Spieth, and others, we have a massive investment in place. Yet it's clear to me that we are not capitalizing on our assets to our best advantage or return. Driving brand heat, of course, is not a one-size-fits-all approach. We cannot simply apply the same storytelling product and distribution strategies across the regions and expect to generate the same levels of brand heat globally, yet unifiers can be crucial to driving consistency.
We exited undifferentiated wholesale doors reduced our off-price exposure by more than two-thirds and reorganized our people, systems, and processes…In North America, we run a very productive and profitable outlet business with our Factory House concepts, but these represent about 90% of our physical DTC locations in the region. That leaves only 18 full-priced brand health stores in our home market, not many places where we can showcase our brand in the best presentation possible. So compared to the roughly 75%/25% split that many of our competitors have working for them, this is an opportunity for premium growth. As such, we plan to focus our full-price stores and productivity and consumer experience, driven by smaller, easier to navigate store formats, better storytelling to appeal to young athletes, exceptional customer service and always being in stock. By the end of this calendar year, our full-price concepts will also be revamped to showcase sportstyle products with a more robust curation. Longer term, we want to build on this progress by expanding the number of full-priced health stores as we perfect this. Nearer term, based on learnings from our Flatiron New York City pop-up as part of the SlipSpeed launch, we are working to identify additional ways to support critical moments like sporting events, competitions and festivals.
In our wholesale business, we have solid relationships with best-in-class sports specialty, department stores and pure-play e-commerce companies. Still here, too, the critical mass in our U.S. business is oriented towards good-level products. We have an opportunity to build out the better and best part of our segmentation. In addition, we continue to evolve our strategic partnerships towards areas where we believe we are underpenetrated, including the mall and run and golf specialty shops as examples. To wrap up, this becomes our third strategic priority, which is to drive U.S. sales. Improving our U.S. business is critical to growing our global business. As a most profitable region, growing faster here means more future dollars to invest in product, marketing…”
In terms of near-term outlook, Under Armour expects revenue to be roughly flat for the trailing-twelve-month period from March 2023-March 2024, with the U.S. down due to weaker wholesale orders.
Allbirds
Allbirds reported another difficult quarter, including a revenue decrease of -13% and an EBITDA loss of -$22M. Revenue declined primarily due to a contraction in average price, driven by high promotional activity. Gross margin was down to 40% versus 52% in the prior year. Q2 revenue is expected to be down at a mid-teens rate to last year. The business continues to consume cash, -$24M for the quarter, but at a slower rate. The balance sheet has $144M in cash and equivalents. One new U.S. location was added during the period, and on their Q1 2023 update, management said they would pause openings and expand wholesale distribution strategies with Dick’s, Nordstrom, REI, and Scheels. On e-commerce, Co-Founder Joseph Zwillinger stated, “We drive a higher full-price sell-through inside of our brick-and-mortar stores. That is really the best expression for the brand. We have the highest NPS in our 4 walls, and we do drive higher full-price sell-through…in terms of how we're going about improving productivity in the stores, it's really we're here to sell shoes in the stores and focusing on what we can control in the 4-wall is probably the most important.” Unfortunately for the brand and business, inventory is still bloated (turns of only 1.15X versus industry averages of 5-7X) which inhibits its ability to put fresh product onto the shelves, demonstrate newness, create scarcity value, and build brand heat/excitement.
Foot Locker
Foot Locker reported a comparable-store sales decline of -9.1% for its April-end quarter, with CEO Mary Dillon saying in the quarterly press release, “Coming off…our Investor Day [on March 20th] … our sales have since softened meaningfully given the tough macroeconomic backdrop, causing us to reduce our guidance for the year as we take more aggressive markdowns to both drive demand and manage inventory." On its update call, Dillon said, “We've seen the consumer retrench as they continue to face pressure from rapid inflation which we see squeezing their ability to spend on discretionary items, including athletic footwear. In addition to overall discretionary spend seeing some pressure, those spending dollars also appear to be directed more towards services and away from products as consumers are forced to be more choiceful on how to spend their money.” (All of these characterizations are consistent with our description of the retail market since last November).
For the quarter, the WSS banner comp was -3.3%, Foot Locker was -5.5%, but Champs was down -25%. The 25% increase in inventories is very misaligned with the sales trend and turns deteriorated to 3.2X, far below the normalized 4.5X. Gross margin declined by 400 bps due to higher markdowns, increased theft-related shrink, and occupancy expense deleverage. Guidance for the year was meaningfully lowered with the mid-point of comps down -8.25% (from -4.5%) and earnings to $2.13 per share (from $3.50 per share). The biggest driver of the lowered earnings guidance was more aggressive markdowns and higher shrink. And so, it’s these convoluting dynamics along with the pandemic and 2022 clearance pull-forwards that will make 2023 (and likely 1H 2024) a challenging period for athletic footwear retailers to get inventory well positioned which is the precursor for rebuilding profitability.
Dillon also noted, “When we gave guidance, we are seeing steep comp declines given a number of factors: our reset with Nike, our transition of the Champs banner, our shutdown of the East Bay banner...As part of our guidance, we had forecasted a pickup in growth in April as we move past the tax refund drag and benefited from a more favorable launch calendar during the month. And while trends did improve, they did not improve nearly to the extent we expected, and that weakness has continued into May.” Chief Commercial Officer Frank Bracken said, “Lifestyle running was the category with the most disappointing sell-through for the quarter as many of the styles were carryover from holiday 2022, and were promoted throughout the Q4 season, the consumer was resistant to a return to full price selling in Q1 2023. That, combined with lower tax refunds and a challenging financial picture for our lower-income customers created a significant headwind for our marquee lifestyle running franchises, which are normally full-priced from $120 to $200.” In discussing Champs, Bracken said, “Comps were down 25% as we preferred Foot Locker for key launches and constrained supply of Nike Inc. products during the reset. The higher penetration of apparel, which underperformed as a category was also a drag on the banner.”
