2 Reasons Foot Locker Is a Retailer to Watch in 2023

Foot Locker (FL) has been on a tear in recent months. The sneaker retailer’s stock has gained more than 16% in the past 30 days and 37% over the past three months. It’s no coincidence that most of these gains came after former Ulta Beauty (ULTA) CEO Mary Dillon was named Foot Locker CEO last August.  

Before you jump into FL stock, you must realize that the easy gains have been made. A high-profile hire like Dillon will do that. However, the stock has remained in negative territory over the past five years while Dillon’s old firm’s share price is up more than 133% over the same period, almost 3x the S&P 500. 

Dillon got an excellent assist Wednesday on news that Credit Suisse analyst Michael Binetti upgraded Foot Locker from Neutral to Outperform with a 60% increase in his target price to $62, 38% higher than where it’s currently trading.

As I write this in Wednesday afternoon trading, FL stock is up 2%. Who knows if it will stay in positive territory? What I do know is that Foot Locker is a retailer to watch in 2023. 

Here are two reasons why. 

Dillon Has a History of Delivering

In the nearly eight years that Dillon was CEO of Ulta -- her first day was July 1, 2013, while her last was June 2, 2021 -- the company’s stock gained 227%, 66 percentage points higher than the S&P 500. 

Public company CEOs are paid to deliver above-average shareholder returns, and she did, which is why Foot Locker came calling a little over a year after she stepped aside.

Interestingly, Dillon went through a succession planning process at Ulta around the eight-year mark, just like Richard Johnson, former Foot Locker CEO, who remained with the company as Executive Chairman until Jan. 31.

“We are confident that Mary is the ideal person to serve as Foot Locker's next CEO and lead the Company forward. Mary has established a remarkable track record in the retail industry, and she brings an incredible mix of talent, experience and commitment to take Foot Locker to the next level,” Johnson stated in Foot Locker’s Aug. 19, 2022, press release announcing his retirement and Dillon’s appointment.

When a new CEO joins a company, management changes are made. Dillon has made several. The company’s Chief Operating Officer, Frank Bracken, became its Chief Commercial Officer on Dec. 1. Former Ulta supply chain and IT boss, Elliott Rodgers, became Ulta’s COO, replacing Bracken. In addition, CFO Andrew Page and Chief Human Resources Officer Elizabeth Norberg both have exited Foot Locker.

Dillon built up Ulta’s omnichannel business in the eight years she was CEO of Ulta. She plans to do the same with Foot Locker, which explains why she brought an operations person from Ulta to support the company’s growth plans. 

Dillon is a significant reason Foot Locker is a retailer to watch in 2023.

The Soured Relationship With Nike Is Fixable

One of the main reasons Binetti upgraded Foot Locker stock is its improving relationship with Nike (NKE).

If you’re unfamiliar with the Nike saga, Foot Locker stock took a big hit in February 2022 after Johnson said in a conference call that he expected revenue from Nike products to continue to decline as the Oregon-based brand moved to a more DTC (direct to consumer) strategy. 

In the three most recent fiscal years (January year-end), Nike’s contribution sunk from 75% in 2020 to approximately 60% in 2022. It reports its fiscal 2022 results at the end of February. 

However, since Johnson said that, Dillon’s been able to have good discussions with Nike, who appear to be less motivated to abandon one of its biggest revenue generators.    

“We see consistent evidence that the Nike relationship is improving, and we’re increasingly convinced that the planned pullback from FL will be far less damaging than we initially expected,” Benzinga reported the analyst’s comments. 

While Nike has pushed its DTC business hard since 2017 -- resulting in the doubling of the segment’s revenue over the past five years --  its wholesale revenue grew faster than DTC in the latest quarter ended Nov. 30. DTC revenues, excluding currency, rose 25% in Q2 2023, 500 basis points less than wholesale.   

As Nike’s wholesale revenue has dropped from 72% overall in 2017 to just over 50% today, it appears the company has had a change of heart regarding Foot Locker and Dick’s Sporting Goods (DKS), its two largest wholesale customers.

“[W]e had our -- our wholesale partners on campus in September for the first time in three years and exposed them to our product innovation pipeline and just talked about how working together we can really serve that consumer through connected membership,” Nike CEO John Donahoe stated in the Q2 2023 conference call.

Like Williams-Sonoma (WSM), Nike appears to have realized that a 50/50 split between DTC and wholesale provides a more robust business model in all economic environments than one more skewed to DTC.

In the conference call, he said that his team spent much time with Dillon’s team, suggesting that the relationship isn’t nearly as strained as some might think.

Dillon is going to do what is best for its customer. That might mean a lot more Nike products, but it could also mean diversifying the brands it sells in-store and online.

By no means will 2023 be a cakewalk for Foot Locker, but Dillon’s got a strategic plan to simplify its business. This includes dropping brands such as Eastbay in the U.S. and Sidestep in Europe.

The changes made by Dillon should start to pay dividends later in calendar 2023. Until then, if you can buy on a correction below $40, you ought to do well in 2-3 years. 

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