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For Another Way to Play Nike, Consider Foot Locker Shares

Nike (NYSE: NKE) shares climbed 37% last year, but the average analyst price target is for just an additional 7% gain in 2020, so some investors might be a little nervous about buying into the athletic apparel giant now. But Nike shares aren't the only way to play this company.

Foot Locker (NYSE: FL), whose shares stumbled last year -- losing 27% -- is also a way to get in on the action. Nike accounts for about 70% of the retailer's merchandise purchases, Jefferies analysts wrote in a 2018 note.

Image source: Getty Images.

Among the elements that could boost Foot Locker this year are the popularity of Nike's Jordan brand and a slew of new products connected to upcoming athletic events. Nike's decision to reduce the number of retailers it partners with -- while Foot Locker remains a noted partner -- could also be a positive for Foot Locker, as it means less competition.

Foot Locker could use a lift after the lackluster third-quarter report it delivered in late November. Though the retailer beat analysts' earnings estimates, its apparel segment suffered, leading management to forecast flat same-store sales for the fourth quarter. The company said full-year comps would be in the low single-digit range, after having predicted a mid-single-digit gain a quarter earlier. However, the footwear segment, powered by sales of Nike styles such as the Air Force 1, was a bright spot in the report.

First billion-dollar quarter for Jordan brand

And here, in footwear, Nike recently reported good news that should flow through to Foot Locker's earnings in the coming quarters. The Jordan brand had its first billion-dollar quarter, and the company said that, in many cases, demand exceeded supply. Jordan sales were strong in both North America and Europe, and Nike said it's just at the start of diversifying the brand's product line. The Tokyo 2020 Olympics and this summer's European soccer championships will drive new product launches as well, Nike said.

Nike's move -- made public a couple of years ago -- to reduce its number of retail partners and focus on about 40 might make some retailers nervous that they will get cut out of the action, but Foot Locker seems to have remained on Nike's favored-partner list.

Fortune recently noted that Foot Locker's stores are connected to Nike's app. Another example of the Nike-Foot Locker relationship: Foot Locker last year opened a "Power Store" in New York City in partnership with Nike. A variety of popular athletic brands line the stores' shelves, but what makes this a true Foot Locker-Nike experience is the integration of the Nike app. Members of the NikePlus loyalty program get benefits including exclusive access to products and the option of reserving items online and picking them up in store. With this sort of initiative, as well as Foot Locker-Nike exclusives like Nike swoosh footwear collections that celebrate Nike's famous logo, it's clear that the companies' relationship is strong. There's good reason to believe Foot Locker will benefit from Nike well into the future.

One big concern is that Foot Locker might suffer from its dependence on the brand as Nike makes a push to increase its direct sales to consumers. Nike's efforts to bring customers into its own stores and onto its website surely will sap some sales from third-party sellers, including Foot Locker. Still, Foot Locker's partnerships with Nike and sales of exclusive Nike products offer it the opportunity to benefit from the brand's growth. Investors will have to wait for a few more earnings reports from Foot Locker to determine whether the close relationship with Nike is enough to insulate Foot Locker from Nike's direct to consumer efforts.

Foot Locker is trading at about 8 times earnings, 70% lower than a peak in 2018. Analysts' average price target is $47.14, 24% above where it trades today and the average analyst recommendation is a "buy." Considering those numbers and all that Nike may contribute to Foot Locker's sales picture, the retailer's shares look like a bargain.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.


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