It seems counterintuitive, but if Nike (NKE) is truly in trouble from increased competition from the likes of Adidas (ADDYY) and Growth Seeker holding Under Armour (UA) , that could spell brighter times for shoe retailers like Foot Locker (FL) .
Jim Cramer agrees with this view, advising prospective investors in the sports apparel sector to take a look at Foot Locker. As competition among the companies heats up, price wars are bound to ensue, enticing shoppers to spend more at Foot Locker.
Jefferson Research published a recent note giving Foot Locker's earnings quality, balance sheet quality and cash flow quality its strongest rating, while FL's operating efficiency was rated as strong. Jefferson maintained its Buy rating on Foot Locker's shares.
Nike's troubles have just begun, according to a note from Bank of America Merrill Lynch analyst Robert F. Ohmes. He believes Nike will continue to lose market share to Adidas and Under Armour, prompting him to downgrade Nike to Underperform from Neutral while also lowering the price target to $46 from $55. That judgment came following the firm's Asia Retailing and Sourcing Tour.
"Nike did not launch a major platform during the Olympics and we do not expect any significant new platform launches in the near term," Ohmes wrote. "Given the long industry lead times (nine to 12 months) as well as strong momentum and distribution expansion from competitor brands, we believe Nike is at least 12 months away from returning to market share gains."
Indeed it is a bad time for Nike to be resting on its laurels. German shoe-maker Adidas is making a major comeback in the U.S., leading the company to raise its 2016 outlook, forecasting currency-adjusted sales to rise 15% year over year vs. its previous expectations of growth between 10% and 12%. Merrill Lynch believes Nike's international expansion is poised to decelerate and expects inventory to increase.
Meanwhile, Under Armour took a hit following its earnings release last week, but CEO Kevin Plank made it clear that now is the time for the company to invest heavily in itself as it looks to push its shoe business. Apparel is still the money-maker for the company, with footwear accounting for only 19% of the company's overall revenue compared to 62% for Nike. Despite Nike's lead in the space, Under Armour saw 42% year-over-year growth in its quarterly footwear segment.
Meanwhile, Foot Locker is in prime position to benefit from Adidas' continued push into North America and Under Armour's investment in its footwear business.
"We see positive reads for athletic specialty retailers based on UA's reiterated revenue targets (indicating strong continued demand and pipeline) and accelerated investments to support the brand and product development ahead," a Citigroup note said last week. "Citi's meetings with Foot Locker and Finish Line (FINL) last week indicated both retailers are pleased with how focused their three top vendors (Nike, Adidas and Under Armour) are on product development and athlete relationships, which should be a positive tailwind for their business as it will grow the industry."
The firm also noted that 30% of Foot Locker's sales come from outside the U.S., which again puts it in prime position as Under Armour looks to expand its international footprint.
As the top sports retailers engage in this arms race, Foot Locker, the arms dealer, will benefit the most.