Amazon is not the only problem

Some Thoughts On A Finish Line

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cheap jordans online Understanding The Context I discuss many stocks in the sportswear/athletic footwear industry regularly on Seeking Alpha, but I have never covered Finish Line (FINL) outside of the Consumer Alpha community. I think the recent announcement of a merger agreement with JD Sports Fashion Plc (OTC:JDSPY) is an excellent reason to make an exception. cheap jordans online

cheap jordans free shipping Let me tell you from the beginning that I haven’t been a big fan of Finish Line and its cheap jordans online peers in recent times. I think third party retailers in the sportswear industry, in particular in the shoes segment, are facing strong competitive pressures from several sides, and what might seem to be a very cheap and attractive valuation to some bargain hunters Cheap jordans may easily end up being justified by the unfavorable underlying trends. In particular, there are a few forces exerting strong pressures on the growth and margin prospects of companies such as FINL, Foot Locker (FL), Hibbett Sports (HIBB) and their peers. cheap jordans free shipping

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cheap jordans sale The first and most obvious challenge is the increasing competition from large and fast growing competitors in the eCommerce industry. Probably, I wouldn’t need to tell you that I am mainly referring to Amazon (AMZN). The eCommerce giant implements an extremely aggressive pricing strategy in order to gain market share at the expense of mature retailers that enjoy healthy margins. Amazon’s fast growth and success in basically every segment it operates in creates price and margin pressures for retailers. Amazon is not the only problem. In general, the fast growth of eCommerce is limiting retailers’ pricing power, as online customers are more price savvy as it’s much easier and cost effective to compare different alternatives and choose the most convenient one. cheap jordans sale

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cheap jordans shoes Another strong cheap jordans on sale negative force is the brands’ recent focus on expanding their direct to consumer businesses, basically diluting third party retailers’ market share. I think this problem can be particularly painful for third party retailers in the athletic footwear industry because this industry is particularly concentrated. Think to the market share that Nike (NYSE:NKE)/Jordan and adidas (OTCQX:ADDDF) own basically everywhere. This is in part mitigated by the third party retailers’ push to obtain an increasing number of exclusive products from brands, but we just need to visit one Foot Locker or JD Sports store to understand that this is still a marginal phenomenon. In general, brands have all the cheap jordans in china interest in maintaining a good relationship with third party retailers (as they still account for a huge portion of their sales) but don’t have any interest in fighting the secular growth in the DTC channel (especially the digital DTC channel) either, as its expansion is accretive to margins, thanks to the possibility to cut middle men costs. Nike has stated more than once that the company’s focus remains on growing the DTC channel and the eCommerce segment in particular. cheap jordans shoes

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cheap yeezys After following this sector for a few years, my view is that the two aforementioned sources of pressures for cheap jordans china revenue growth and cheap air force margins are the most important ones and should be kept in mind every time we try to assess the attractiveness of any stock in this industry. Besides those factors, there are other minor factors that should be mentioned as well. The first factor is the apparent overcapacity in the retail industry in North America, which has 5 6 times the retail square footage per capita of countries like France or Japan. These retailers’ enormous exposure to the North American market can be a problem if overcapacity continues to bring financial distress to the relatively weak players, with the increase in promotional activity cheap Air max shoes that these situations tend to trigger. cheap yeezys

cheap adidas Once we understand the context and the current sources of potential problems for Finish Line, JD Sports, and cheap jordans from china its peers, we can move the discussion to the specific name and the recent developments, which are interesting for sure. cheap air jordan cheap adidas

cheap jordans on sale Geographic Diversification, Synergies, and Implications I mentioned the excessive exposure to North America and it’s important to understand how this factor can be a problem besides the structural overcapacity cheap jordans china mentioned before. There is one point that needs to be clarified. North America (and Western Europe as well), despite the recent fast growth experienced by brands such as adidas or Puma, or by Jordan and Under Armour (NYSE:UAA) before, remains a mature economy that offers much lower growth rates compared to the emerging markets. While the expansion of eCommerce is a worldwide phenomenon, its effects in those mature markets are exacerbated by the low growth rates in the industry. Emerging markets don’t seem to face the same issues. Economic growth in Asia Pacific or in many markets in Latin America is strong enough to allow excellent revenue growth despite the increasing penetration of eCommerce and the brands’ DTC platforms. In other words, a slightly smaller slice of a much bigger cake still translates into much higher sales. cheap jordans on sale

cheap Air max shoes Here is where acquisitions and mergers such as the one that involves Finish Line and JD Sports Fashion come in. I have been saying for a while that retailers in this business should try to merge with peers in order to increase their scale, but there is one substantial difference between the strategy Finish Line and JD Sports are pursuing, compared to what I would have expected. In order to face the problems of anemic growth and market share loss to the brands’ own eCommerce platforms, it would make sense to seek larger exposure to more attractive markets that can deliver many years of growth despite the unfavorable industry dynamics. I am referring to China, Southeast Asia, India, and Mexico, to name the most important ones. cheap Air max shoes

This is not what Finish Line and JD Sports Fashion plc are seeking, and it’s easy to see why. Finish Line basically derives 100% of its sales from the United States. Conversely, JD Sports Fashion is almost only exposed to the European market and to the United Kingdom in particular:There is no doubt that the two companies show the maximum level of complementarity, with zero overlaps in terms of geographical markets served. On the other side, it’s clear that none of them has exposure to emerging markets. The new entity would have the benefits of a more geographically diversified revenue but would remain basically 100% exposed to mature, slow growing markets.

Cheap jordans The choice to merge with another company that operates only in mature economies suggested me something. If the benefits of a larger size are clearer than the benefits of gaining exposure to fast growing markets, then it means these companies are trying to protect themselves from the increasing competitive pressures exerted by the expansion of eCommerce and DTC capabilities. Their intention is probably to increase their bargaining power with brands in order to obtain more favorable buying conditions and force brands to offer a larger percentage of exclusive items in exchange for a deeper collaboration. Cheap jordans

cheap air force In a context where size is really starting to matter, this is what we should expect from basically every retailer that operates in the cheap jordans shoes athletic footwear industry (and other areas of retail as well). A larger size can surely generate cost synergies and allow the new entity to have a larger bargaining power with brands (which helps margins) and a larger number of exclusive items (which helps foot traffic, sales and margins as well), but we should be as objective as possible when trying to estimate the potential result. How much can JD Sports/Finish Line’s scale actually help? To understand this, we can look at Foot Locker, the current industry leader in the athletic footwear market. Foot Locker generated $7,782 million in sales in the last four quarters, against $5,729 million for JD Sports and Finish Line combined ($3,885 million for JD plus $1,844 million for Finish Line). Even after the merger, Foot Locker would still be 36% larger than FL/JD, which means the new entity shouldn’t be able to have a stronger bargaining power with brands or any other particular scale advantage. What is important to mention is that Foot Locker itself, despite the larger and strong bargaining power, was not immune to all the problems that have affected the industry in the past few years and is expected to report anemic growth rates and margin contraction in basically every year analysts are trying to forecast. A smaller peer will probably not achieve better results in cheap jordans sale these conditions. Foot Locker’s 10% EBIT margin is not far from JD Sports’ 9.8% EBIT margin expected by analysts but significantly lower than the 2.5% cheap adidas EBIT margin reported by Finish Line for the twelve months ending February 28, 2018. Other conditions being equal, the combined company would report a 7.59% EBIT margin, which I estimate to get closer to 8% once some operating cost synergies are factored in. If we assume the company will be able to reach the same level of profitability of Foot Locker, we can expect a 200bps increase in EBIT margin, but this would mean ignoring Finish Line’s recent weakness and assuming that all the current problems can be easily solved after the merger as a simple result of a higher scale and a stronger bargaining power. cheap air force

cheap jordans from china I am not against this deal, and, after all, I don’t think Finish Line’s prospects are so bright to make the price paid by JD Sports cheap jordans for sale Fashion ($13.50 per share) appear too low. The recent trends in Finish Line’s comps and profitability are describing the situation clearly. Investors can surely benefit from a business with a larger scale, geographic diversification, and the stronger bargaining power the new entity would have with brands. On the other side, I think it’s important to consider that the merger doesn’t solve any of the main issues definitively. The problem of overcapacity in the United States is still there, the non existent exposure to high growth areas hasn’t been addressed, and the brands’ eCommerce growth will continue as fast as before. This merger was created by mutual need, as Finish Line was desperately needing a larger scale to get a stronger bargaining power, while JD Sports needed to find another easy target to satisfy its appetite for external growth (40% sales growth vs. 3% comps growth in H1 2017). Now, we need to see whether JD Sports will be able to replicate the success cheap jordan sneakers of its business model in such a different market, where declining foot traffic, competition from eCommerce players, and structural overcapacity have created a much less favorable environment compared to Europe. This should not be taken for granted. cheap jordans from china

cheap jordans in china Disclosure: I am/we are long NKE. cheap jordans in china

cheap nike shoes I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article cheap nike shoes.

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