Dive Brief:
- Despite drastically lowering their full-year outlook for the Foot Locker business, acquired a year ago, Dick’s Sporting Goods executives defended the mall chain on Tuesday.
- A dearth of sneaker launches, changing taste in athletic footwear and the market conditions overseas helped create an inventory glut and a highly promotional environment in Q2, sending Foot Locker comps down 3.6% year over year, they said.
- The company now expects Foot Locker comps to be flat or fall as much as 2%, compared to previous expectations for 1.5% to 3% growth, and an operating loss ranging from $40 million to $80 million, compared to previous expectations for profit of $110 million to $150 million.
Dive Insight:
The promotional environment in athletic footwear, especially lifestyle sneakers, is extreme at the moment and will last through the rest of the year, according to Dick’s Sporting Goods Executive Chair Ed Stack, speaking on a conference call with analysts Tuesday.
Comps at Dick’s also missed expectations, but rose nearly 5%, spurred by “broad-based growth across categories, including strong results from the 2026 FIFA World Cup, and growth in average ticket and transactions,” the company said in a press release Tuesday.
“We're going through that with these legacy silhouettes, the new styles of shoes that are coming out from brands across the board — whether it be Nike, whether it be [Adidas], whether it be On, Hoka — we're going through that reset right now,” Stack said.
Running and performance shoes are performing well, but lifestyle footwear is struggling as people move on from some legacy sneaker silhouettes and other types of shoes, executives said.
“I do think there is a shift toward this brown shoe piece of this ... whether it's Ugg and Birkenstock, and we continue to participate in those,” Stack said. “Those businesses for us are really on fire. They're up significantly. We've got a couple of other brands that we're looking at to bring in also, and so they will help offset this, as the athletic business goes through this transition period.”
Dick’s will benefit the most from those shifts, though there will still be margin pressure, especially in Q3, he said.
For the year, operating margins at Dick’s are now expected to range between 10.6% and 10.9%, down from the previous expectation for 11% to 11.4%, and gross margin is expected to decline slightly, Chief Financial Officer Navdeep Gupta said. This anticipates not just a more promotional marketplace but also higher fuel prices and supply chain expenses.
The situation is affecting both Dick’s and Foot Locker, but Dick’s more diverse retail, category and brand mixes are insulating the business to some extent. Executives said that Foot Locker’s struggles in Europe took them by surprise.
“None of this changes our confidence in the long-term opportunity at Foot Locker,” Stack said.
But the chain’s Q2 performance suggests that the acquisition was unwise, and executives’ remarks suggest they didn’t know what they were getting, some analysts said.
“Sadly, the best path may be to admit the mistake now and write-off the entire chain,” John Zolidis, president and founder of Quo Vadis Capital, said in a Tuesday research note, warning that Dick’s may have to divert capital in order to rehabilitate Foot Locker and stem operating losses.
Indeed, Stack told analysts that it’s still early innings for Foot Locker’s turnaround.
“Shareholders are now saddled with a chain that has structural issues including the complexity of overlapping banners in multiple markets, over-dependence on a single struggling vendor, aged mall-based real estate, as well as exposure to a lower-income consumer cohort,” Zolidis said.
