Foot Locker’s Spree Sneaker Lacks Supporting Fans
Sneakersheads have a reputation for pushing up prices. Unfortunately for Foot Locker, that was not the case for its shares when the company announced two sneaker-related acquisitions on Monday.
Foot Locker announced the purchase of WSS, a Los Angeles-based sports retailer, and atmos, a Japan-based streetwear and sneaker seller, for a total of $ 1.1 billion. The company paid the separate transactions in cash, which is roughly half of its cash balance in the last quarter. Acquisitions are expected to boost Foot Locker’s earnings this year, but its shares fell 2% on Monday.
Given Foot Locker’s heavy exposure to mall-based stores, some diversification appears to be cautious. The pandemic has shown that it is wise to diversify from traditional sales channels. WSS’s store base is entirely off-mall and concentrated along the West Coast, an area where Foot Locker is less present, and the atmos brings exposure to e-commerce. While Foot Locker generated about a quarter of its online sales last quarter, atmos generated over 60% of its sales digitally last year.
It helps that the two retailers are serving different ends of the price spectrum. WSS sells cheaper products and caters to families; atmos is known for its premium products and collaborations with popular brands such as Nike, Vans and Adidas. Exposure to two very different price points could provide useful protection against weak consumer confidence at either end of the income spectrum. And the addition of atmos, which has a reputation with sneakerheads, could help solidify Foot Locker’s relationship with Nike, which is becoming increasingly picky about the retailers that sell its products.
That said, the deal was not cheap. For WSS, Foot Locker paid around 1.8 times the retailer’s 2020 revenue, while for atmos it paid 2.1 times on the same basis. The purchase price of atmos could actually increase, depending on its revenue and results. These are significant premiums compared to Foot Locker, which itself trades around 0.8 times by the same metric. To justify the price, Foot Locker will need to prove that the newly acquired companies have a better growth trajectory. Otherwise, its cash would have been better used to satisfy investors through share buybacks.