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Why Foot Locker Is In A Sweat

News: Analysis & Commentary: RETAILING


Woolworth's big bet on athletic footwear is souring

To find out why things aren't going too well in the executive suite atop the fabled Woolworth Building in lower Manhattan, take the elevator down to the ground floor. There you'll find an outlet of Foot Locker, the sports shoe chain that's supposed to be Woolworth Corp.'s salvation. A hip young man has just decided against buying the latest Nikes and is walking out empty-handed. "I can't spend that much," he says. "Besides, there's not enough selection or atmosphere."

After making the tough decision last summer to shutter the five-and-dime stores that launched the Woolworth empire a century ago, Chief Executive Roger N. Farah had made Foot Locker the linchpin of his turnaround plan for the $7.1 billion retailer. But same-store sales at Foot Locker have been falling for seven months, as fickle teenagers spurn costly Nikes for other footgear and larger superstores push around the industry pioneer. "It's been very, very challenging," Farah sighs.

"SHAKEN UP." Farah had good reason to bet on Foot Locker when he became CEO in late 1994. Riding a fitness craze that doubled sales of sports shoes and apparel since 1987, Woolworth's athletic division--which includes Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs, and Eastbay catalog--has grown into a $3.6 billion business. Its 1996 profits of $461 million exceeded those of the entire corporation, as other units lost money.

But Foot Locker can no longer support Woolworth. It's slipping in a slowing market. After soaring 10.2% last year, the $8 billion athletic-shoe industry is growing at half that rate this year. Of all the players, Foot Locker is getting hit hardest. The most alarming sign was its 11.2% slide in same-store sales in August, the crucial back-to-school sales season. "They gave up on a dead industry in favor of putting all their eggs in one basket," says Kurt Barnard, a veteran retail watcher who publishes Barnard's Retail Trend Report. "And that basket is getting shaken up. They're going to have scrambled eggs."

Once known in the industry as Big Foot, Foot Locker is still the largest retailer of athletic footwear and apparel, with about one- fourth of the U.S. market. But it is rapidly losing ground to newcomers that have stores as much as 10 times its size. At some Just For Feet Inc. and Sneaker Stadium stores, kids can try out gear on real basketball courts. Foot Action features racks of spandex and sweats, as well as sports shows on big-screen TVs. "These larger formats give retailers the opportunity to romance products better," says Thomas E. Clarke, president of Nike Inc.

Foot Locker was slow to respond to the shifting marketplace, partly because Farah was busy stabilizing the rest of the corporation. He eliminated 16 divisions, fired 45 top executives, and tried in vain to preserve the namesake five-and-dimes. He slashed jobs and installed computers to better track inventory. But the problems only worsened, as employees and unattended customers walked off with mounds of merchandise. By the end of the year, internal documents show, the retailer could not account for $43 million in inventory at the five-and-dimes. The so-called shrinkage amounted to 5.82%--three times the companywide average.

By the time Farah finally pulled the plug on the Woolworth stores, Foot Locker was in a tailspin. In droves, teenagers were abandoning Nikes for "brown shoes"--Doc Martens, Timberland boots, and the like. Purchases of high-priced sneakers, which had been Foot Locker's forte, plunged. "I told them to paint 'em brown and mark 'em down," says Alfred Kingsley of Greenway Partners, a major Woolworth investor.

Woolworth raced in truckloads of brown shoes. But it still had the problem of dinky selling spaces. Farah's answer? Create instant superstores at many of the company's 1,550 Foot Locker outlets by literally pushing back the stores' stockroom walls. By late next year, he expects to convert 100 of the five-and-dimes into superstores that will combine all the company's athletic-wear offerings under one roof. Farah figures that those conversions alone will boost sales $300 million to $400 million.

Woolworth also is eyeing acquisitions and expansion overseas. It just opened its first store in Japan and plans to double its presence in Europe. But these big plans require big money and good credit--neither of which the retailer can count on. That is why Woolworth now plans to sell its landmark skyscraper. "It's worth $100 million," Farah says. It also has a great Broadway storefront--for the right retailer.By I. Jeanne Dugan in New YorkReturn to top

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