Goldman's Foot Locker Slam Wasn't a Dunk

A year later, its bad call on the shoe retailer is just as bad.

Ahead Of The Pack

Foot Locker's shares are up 65 percent over the last two years

Source: Bloomberg

Sometimes being too early with a market call is the same thing as being wrong. 

Take Goldman Sachs. On Wednesday it repeated a call it first made a year ago, telling investors to sell shares in Foot Locker. That was not a good call: The sports retailer's stock has jumped 21 percent since Goldman's sell recommendation. It is up 67 percent over the past two years, outpacing high-flying Nike and Under Armour and easily topping the S&P 500's 4 percent rise.

In its research note explaining why Foot Locker is about to start shooting bricks for real this time, Goldman declared it wasn't wrong with its first call -- just early. 

Nope, Goldman. You were just wrong. And you still are. 

Goldman argues that basketball sneakers are falling out of fashion and that, as Foot Locker shares have gone up for so long, they are bound to come down. It's a pretty shaky argument, especially when you consider that Goldman has a "buy" rating on Nike, which is where Foot Locker gets 73 percent of its merchandise. 

Buying shares of Foot Locker has long been seen as a way to get exposure to Nike's success and the growing athletic wear market -- but on the cheap. That's because Foot Locker's shares are trading at around 13 times forward earnings, compared to a multiple of 15 among its peer group and a multiple of 24 for Nike. 

Cheap Kicks

Price/earnings ratio

Source: Bloomberg

Goldman is right that basketball shoes are an important part of the sports business -- they make up 30 percent of Foot Locker's sales (according to Goldman) and 14 percent of Nike's sales. They can often command much higher prices than, say, casual sneakers.

And the basketball business has been especially volatile this year. While Nike has long controlled the basketball market, recently the buzz has shifted away from some of its famed retro Jordans and Lebron shoe lines, toward Under Armour, whose Stephen Curry basketball shoes have been a runaway success. And while Under Armour is hiking some of its prices, on average they are about 20 percent cheaper than Nike's offerings. 

That could be one factor in slowing price increases at Nike, undercutting what had recently been a source of revenue growth. 

Growth Drivers

Nike's shoe price hikes, rather than unit sales, drove overall sales growth--until recently

Source: Bloomberg

Despite the perceived weakness in basketball, Foot Locker in its latest quarter reported 9 percent growth in sales from the year before. Foot Locker won't release its fourth-quarter sales results until later this month, but growth in the U.S. athletic footwear industry was estimated to be about 8 percent in 2015 to $17.2 billion, according to market researcher NPD Group.

Foot Locker's Full Force

Year-over-year sales growth at Foot Locker

Source: Bloomberg

In the long term, it would certainly be a smart move for Foot Locker to diversify its offerings (it rakes in about 80 percent of its sales from footwear and only 20 percent from apparel) and get friendlier with Under Armour as it becomes a more formidable competitor to Nike.

But for now, it's important to note that the footwear and active wear businesses are in a constant state of upheaval. Remember LA Lights? Toning shoes? Heelys (the wheeled sneakers)? Crocs? Those were all trends that eventually faded. Last year, as shoppers wore fewer skinny jeans and more jogger pants, they bought more casual shoes and classics and fewer technical running and basketball sneakers.

As trends shift, it will be up to Foot Locker to stay one step ahead. But don't count it out yet. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shelly Banjo in New York at

    To contact the editor responsible for this story:
    Mark Gongloff at

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