June 1, 2016

Foot Locker stock may have peaked

I see another peak to add to the long list of The Many Peaks I See ... "Peak Sneakers"!
Foot Locker store
I've been spending several weeks researching shoe purchases and have concluded that the lure of high-priced sneakers might finally be fading.

I see multiple signs of this phenomenon, including:
- Rising Sneaker Costs. Like health-care costs, sneaker prices have risen to unfathomable levels. But with U.S. wages exhibiting only modest gains, buyers' price elasticity might finally be appearing as sales resistance. At least that's what I've heard in conversations with customers at Foot Locker (FL) and elsewhere.

- Fewer Multiple Purchases. My discussions with customers have indicated that purchases of multiple pairs of sneakers seem to be a thing of the past. Sneakers have simple become too costly, while alternative purchases like videogames and smart phones are gaining popularity.

- Kids Who Want 'Experiences,' Not Apparel. Kids and young adults seem to want "experiences" (video games, iTunes songs, etc.) more than they want apparel or footwear these days. Just ask Macy's or Target.

- Peak Sports Viewership. Also consider the "Peak Sports Viewership" that I wrote about a few months back. We're seeing declining ratings for sports championships, which could have a negative impact on sneaker sales.

- LeBron James' Huge Deal with Nike. Finally, consider reports that Nike might wind up paying basketball superstar LeBron James more than $1 billion for a lifetime endorsement deal on the firm's sneakers and other merchandise. Enough said!

So ... I'm Shorting Foot Locker
Given all of the above, it's little surprise that Foot Locker reported a far-slower pace of quarter-over-quarter comps this morning relative to consensus expectations. The chain cited weakness in basketball-sneaker sales, where Foot Locker has an outsized exposure relative to its peers.

Another disadvantage for Foot Locker is that the chain is mall-centric. My surveys of customers suggest that malls are no longer many consumers' desired destination -- something that recent retail figures have corroborated.

Add it all up and I shorted FL in both the premarket and regular sessions Friday, and I'm placing the stock on my "Best Short Ideas" list as well. (By contrast, TheStreet's Trifecta Stocks model portfolio is long on Foot Locker.)

As an aside, I should mention that more than 90% of Foot Locker shares are institutionally owned. So, a lot of supply might lie ahead. I'll also have a lengthier analysis of Foot Locker next week.

Position: Short FL