UBS analysts: Amazon poses a grave threat against footwear retailers

Dive Brief:

Nike’s decision to sell directly on Amazon threatens mall-based footwear retailers like Foot Locker and Finish Line, which may be next to start closing stores, according to UBS analysts warning of the Amazon threat, Business Insider reports.
Finish Line is especially at risk, according to a note from UBS retail analyst Michael Binetti cited by Business Insider; he downgraded Foot Locker from "buy" to "neutral" and Finish Line from "neutral" to "sell." The findings also come just days after dismal second quarter results from Foot Locker, which reported same-stores sales fell 6% from the year-ago period.
Foot Locker CEO and Chairman Richard Johnson, however, said Amazon isn't a big worry for the company. "We do not believe our vendors selling product directly on Amazon is an imminent threat," he said last week on an earnings call. Earlier this month, Barclay’s and Morgan Stanley analysts said Foot Locker was holding its own against Amazon and is undervalued as a result.

Dive Insight:

Foot Locker’s woes are all the more frustrating considering the retailer’s efforts to upgrade its stores. Last week, executives told analysts the company is accelerating the rationalization of its brick-and-mortar footprint, according to a conference call transcript from Seeking Alpha.

Considering the emphasis the retailer has placed on new store formats, GlobalData Retail Managing Director Neil Saunders didn't expect the recent negative quarterly results. "Given that Foot Locker has been investing in things like new store formats and growing its apparel business, the extent of the negative results come as something of a surprise. This is all the more so because while overall consumer demand for sneakers was a little soft during the quarter, it did not fall by anywhere near the level of Foot Locker's decline," Saunders told Retail Dive in an email. "In other words, the company lost market share."

Foot Locker is the No. 1 seller of Nike brand shoes in the U.S., according to One Click Retail, and several analysts have said they believe the retailer is up to the challenge of Amazon. However, the negative sales numbers, exacerbated by legal fees unrelated its retail operations, took their toll on the bottom line, Saunders said. "[W]e believe that Foot Locker will regain some momentum. However, making up the ground lost this quarter is almost impossible. As such we now view this year as fairly bleak."

A tie-up with Amazon serves Nike in several ways. Rival Under Armour is already selling directly there, and the company has been under pressure to boost its e-commerce sales. Plus, it allows Nike to better control sales of counterfeit goods, which are often easier to pawn off on e-commerce marketplaces. Then there's the fact that consumers are getting more comfortable buying shoes online.

The tricky fit of shoes has helped keep shoppers in stores for those purchases, but Amazon-owned Zappos — with free shipping, free returns and good customer service — has helped ease online shoe shopping, according to Nathan Rigby, a partner at One Click Retail who leads sales and marketing. “Zappos single-handedly built consumer trust in online shoe sales and was so successful that Amazon spent $1.2 billion to buy the company in 2009,” he noted in a report emailed to Retail Dive earlier this month. Amazon saw shoe sales rise 35% last year, One Click Retail found.

But it hurts legacy retailers, especially those without a strong e-commerce play. Hibbett Sports, which didn't even have an e-commerce site until recently, saw its Q2 net sales fall 9.2% to $188.0 million, down from $206.9 million in the year-ago period, and same-store sales fall 11.7%.

Despite Foot Locker efforts to improve stores, many aren't contributing enough, in part because they're not selling the right shoes, Saunders warned. "Foot Locker was a little off-pitch in terms of the styles it showcased and did not have anywhere near enough stock of the key lines and items that consumers wanted," he said. "These things reduced conversion rates and average spend. Admittedly some other unhelpful trends exacerbated this, including footfall declines at some locations where Foot Locker has stores, but these were relatively minor in comparison to the range issues."