Introduction
Nike and Foot Locker are two different companies with highly complementary businesses. Nike is a designer and marketer of athletic footwear and apparel, and is the industry leader in that business worldwide. Foot Locker is a retailer of athletic footwear and apparel. Neither company does any manufacturing – Nike outsources that – but they both are heavily engaged in marketing and therefore have a similarity in terms of marketing and sales to the same customer base. Nike has long been a key supplier to Foot Locker, and Foot Locker a vital vendor for Nike. Nike accounts for around 70% of Foot Locker business (Jiang, 2018). Because these companies do different things, but for the same market, and have a highly symbiotic relationship, they make an interesting financial case study.

There are several ways to compare these two companies financially. First is the financial metrics, which tell the story about how large each company is, and what the state of their business is. The valuation of each company will be influenced heavily by how their business is doing. But the valuation of each company also has a future-facing aspect, and that will also need to be taken into consideration. Further, there are operational aspects, given that they are in different businesses. Nike sells globally, for example, while Foot Locker has more of a North American focus to its business.

Stock Market Performance – Nike

According to Yahoo! Finance, Nike has a current stock price of $83.44, and a market cap of $131.147 billion. This current price is not far from Nike’s 52-week high of $90.00, and well off the 52-week low of $66.53. This range, however, is relatively small, but the market has also traded in a fairly tight range of late. The 52-week high was back in April, and that level was the high point for the stock in the last two years. Nike’s stock has seen a fairly steady, if slow, increase in value since the beginning of 2018.

Nike stock has a beta of 1.07, indicating volatility just above that of the broader market. The limited range within which Nike trades would have led to a prediction of low volatility. In general, Nike operates in a mature market, and has saturated that market. There is only limited room for growth without stealing share from smaller competitors.

Nike has an earnings per share of 2.57, which gives the company a price/earnings ratio of 32.50. This P/E ratio is appropriate for a firm where the market is forecasting moderate growth. Surely this relates to Nike’s strength as a company, which will allow it to continue expanding, even if it has to do so slowly. Some recent ventures, including one for exclusive shoes for Foot Locker, have helped investors to be optimistic about Nike stock.

Stock Market Performance – Foot Locker

According to Yahoo! Finance, Foot Locker’s price is $43.12 per share, which gives the company a market cap of $4.84 billion. The current price is not far from Foot Locker’s 52-week low of $39.06, and is well off the stock’s 52-week high of $68.00. The company saw this high at the beginning of April, the same time that Nike did, but Foot Locker stock has fallen significantly since that point, taking only two months to hit the 52-week low at the end of May. A slight rebound has occurred since that time.

Foot Locker stock has a beta of 1.53, which indicates that it has much higher volatility than the general market. The reason for this volatility is difficult to discern superficially, as its industry is roughly the same as Nike’s but Foot Locker is a much smaller company, perhaps not dominant in its market but very large relative to many competitors. However, there are major retailers that can undercut Foot Locker, so the competitive environment probably is quite a bit harsher for Foot Locker.

Foot Locker has an earnings per share of $4.79, which means that it currently as a price/earnings ratio of 9.01. That is a fairly low P/E ratio, indicating that the market does not see much upside in Foot Locker’s business. The recent sharp drop in the company’s stock price of course affects the P/E ratio, but the drop must have been caused by some factor that caused investors to lose optimism about Foot Locker’s growth prospects going forward. However, further research will be required to understand the current dynamics of Foot Locker’s stock.

Nike vs Foot Locker

Nike is a much larger company than Foot Locker, and that influences how the market perceives the stock. Nike has one of the world’s most recognizable and valuable brands, is the leader in its market, and operates globally. As such, the market would reasonably perceive Nike to have a fairly stable income stream at the very least. But the company does have enough resources to continue to build new markets for its brand, even as its existing markets enter maturity. Thus, the market has given Nike stock a healthy valuation, and the stock is currently trading near its 52-week high.

By contrast, Foot Locker is considered to be significantly riskier. It is a mid-sized retailer, with a specialist market, and high dependence on a single customer. Where Foot Locker needs Nike, at the end of the day Nike does not need Foot Locker. The market sees Foot Locker’s business as being more vulnerable to outside threats, and therefore has low expectations for future growth – the low multiple – and Foot Locker also experiences much higher than average volatility. In many cases, a smaller company or one with a more precarious market position will see higher volatility.

Nike vs. Foot Locker vs. S&P 500

Using the comparison chart function in Yahoo! Finance, the performance of the stocks of both of these companies can be compared with that of the broader market, in this case the S&P 500. While Nike might be compared to the Dow, Foot Locker’s size makes the S&P a better fit for comparison, and the S&P is a much more diversified index overall.

In the first three months of the year, Nike and Foot Locker traded in a similar direction, a slow, steady upward slope. Their fortunes to the beginning of April appeared to be tied to the general sentiment about the athletic footwear and apparel business, and they both peaked around the same time in the first week of April. The S&P 500 over the same time period was rising, but much more slowly. The broader market was seeing a general upswing due to relatively solid economic performance. The difference in volatility between Nike and Foot Locker was not apparent during this period, and both seemed more volatile than the S&P, which has a very steady graph through the first quarter of 2019. Foot Locker was...…in the final quarter of its 2019 fiscal year, it still saw a fairly steep decline in its overall equity value. A slight decline versus the S&P is perfectly reasonable.

Foot Locker’s stock traded more or less in line with Nike for the first quarter, outperforming it slightly. At the time, Foot Locker was engaged in share buybacks, which would have propped up the share values. The company also increased its dividend for the coming fiscal year, another move that should have boosted the share price – and did for a short time. However, Foot Locker’s stock has been on decline since the beginning of April. The sharp decline at the end of May when, despite improved financial performance that was on track with the company’s roadmap, the company nevertheless missed analyst estimates. Had Foot Locker run up in the weeks prior to this, a selloff might have made sense, but that is not what happened. Thus, it was probably a good time to buy as the company appears to be oversold, at least temporarily. This decline has given Foot Locker a poor performance over the second quarter of 2019, despite improved financial performance and management having a fairly coherent plan to transition the company away from dependence on a struggling mall-based business model. That said, Foot Locker’s stock has a three-year beta of 1.53, so it is fairly volatile. This volatility could relate to a relatively low number of outstanding shares, but it also has resulted in a company with a fairly low P/E ratio.

Conclusions

The differences between Nike and Foot Locker are largely reflected in the performance of their respective stocks. Nike is the larger of the two, by a factor of 50, and is more global in nature. This stability is reflected in slow, steady growth, a beta of 1.07, and its dominant market position and brand strength have compelled investors to basically give Nike the benefit of doubt during a period where its core business is struggling. Nike has therefore performed roughly in line with expectations, relative to the S&P 500.

Foot Locker, being a much smaller company, in an intensely competitive business, and with high dependence on a single supplier, that being Nike, has seen greater volatility, and investors have not given Foot Locker the benefit of the doubt in terms of its financial performance. Foot Locker’s stock has always been volatile relative to the broader market, and the response to its latest earnings is no exception. Whether or not this creates a buying opportunity probably depends on one’s perspective of management’s strategy for adding growth to the company’s business model.

All told, the exercise of comparing these two highly complementary businesses is insightful, especially in those instances where a stock performs out of line with what one might expect. Such deviations provide an opportunity to investigate the company and its stock from a variety of perspectives to try to identify what is driving the stock’s movements. The fluctuations in Foot Locker’s stock recently were not that easy to determine, but reactions to earnings can be quite extreme, at least in the initial period after an earnings announcement. The volatility typically settles down – Foot Locker has since increased a little bit off its bottom – but it is always interesting to think about what drives prices in the market because there are so many potential factors that influence stock prices.

References…