Foot Locker, inc.

Strategic Management (BUS 491)

APRIL 27, 2016Tayoung nuyepga

University of Maine at Farmington

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Table of Contents

Industry Analysis 2

Economies of Scale 3

Competitive Analysis 4

Porter’s Five Forces 5

S.W.O.T Analysis 7

Elaboration 8

Financial Analysis 11

Strategic Recommendation Analysis 13

Appendix’s 15

Strategic Group Map 15

Financial Ratios 16

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Industry Analysis

Market size and growth rate

Number of rivals

Scope of competitive rivalry

Number of buyers

Degree of product differentiation

Product innovation

Demand-supply conditions

Pace of technological change

Vertical integration

Economies of scale

Learning/Experience

Curve effects

Foot Locker operates more than 3383 stores in many geographical locations such as Canada, United States and Europe. Foot Locker operates segments as well such as Athletic Stores and Direct-to-Customers. The company has an average of 1796 stores in 23 countries, 971 stores in the United States, 606 in Europe, and 94 stores in Australia and New Zealand.

Foot Locker’s biggest rivals are the Finish Line Inc., Sports Authority Inc., Wal-Mart Inc., Dicks Sporting Goods Inc., Target Corporation, and TJX Companies Inc.

Foot Locker was classified as the number one seller on brand such as Nike, and have been competing with their competitors on delivering quality products on reasoning prices in which their consumers can afford.

Foot Locker targets consumers from 12 to 30 years old in both fashion and athletic apparels, and their consumer base is constantly growing in those age group.

Foot Locker offers different kinds of product lines ranging from men, women’s and children’s athletic and fashionable shoes/apparel, and these products varies from inexpensive to expensive items based on the brand and quality.

Foot Locker as a company is more focused on delivering athletic and fashionable apparels from different brands to consumers, and are more into selling apparels that are in demand by consumers.

Foot Locker is working with major suppliers who can deliver them high quality athletic apparels and shoes for consumers. Foot Locker is always faced with high demands on athletic shoes especially Nike brand because of the Air Jordan.

Foot Locker adopted interactive and touchscreen display used for providing consumers with information, and they also adopted a mobile website.

With the other of their subsidiaries it has allowed Foot Locker in gaining a competitive advantage in the differentiation.

Based on the size of the company, Foot Locker has been able of obtaining a cost advantage due to the higher volume output.

Due to the high demographic locations, the company has been able in providing consumers with high quality athletic shoes and apparels, and has created a broader brand awareness.

As

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Economies of Scale:

The economies of scale involve companies being able of having the ability in lowering their units cost by

increasing their scale of operations as well. Larger companies are more economical in operating than smaller

companies. Also, the higher the operations of those larger companies the lower their cost per unit will become

which allows them in having a greater competitive advantage because they have taken the time in putting their

economies of scale I use. As for a company like Foot Locker there are no exception from these because they

have been focusing in expanding their athletic shoes and apparel distribution/stores that leaves them to be more

economical in operating since there is an extremely high threat to new entry in the industry. In addition, with

Foot Locker having stores in Europe, Australia and New Zealand in gives them an advantage in lowering unit

costs being to the fact that they are not opposed in making separate products for each of those countries in which

they are involved in abroad.

Another economies of scale which Foot Locker possess is the advertising of their product brands which

they sale. Investing in advertisement in bigger events on TV such as FIFA World Cup and Super Bowl that are

worldwide watched events is a great way of spreading the word out to consumers who are watching. Foot

Locker is one of the best consumer retailer in athletic shoes and apparel due to the quality of product in which

they deliver and always keeps up with consumer demand. The company has been able in attracting more

consumers towards them by advertising their new available products brands which they have just gotten and also

because of the type of products they offer which has attracting more customers. With the power of spreading the

words out through advertisement gives Foot Locker a better cost advantage as compared to many of their

competitors.

C ompetitive Anal ysis

Substitute Products

• Companies such as Wal-Mart offers the same products for inexpensive price which consumers can afford without hesitation.

• Sports Authority offers items from the same product line as Foot Locker but for moderate prices.

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Suppliers

• Foot Locker works with major suppliers on delivering high quality products at low cost, with Nike and Adidas leading as suppliers.

• Foot Locker suppliers holds as much power as the company due to the differentiated products.

Rivalry among competing sellers

• Demand is decreasing due to the global economy meaning consumer base and demand is decreasing

• The athletic shoes and apparel industry is getting flat and that leaves these companies in competing on market share

Buyers

• Buyers holds a great amount of power in the athletic shoes and apparel industry.

• Buyers are very price sensitive when trying to purchase athletic shoes.

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New Entrants• The threat to new entrants is very high in the athletic shoes and apparel

industry due to low cost of capital investment.• Geographical expansion in also very high in the athletic shoes and apparel

industry.

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Competitive Analysis – Porter’s Five Forces:

The reason for the five forces is due to the fact that it shows the competitive pressure

based on companies that are in the same industry which in this case in the athletic shoes and

apparel industry. Also, another reason for using the five forces is because since many companies

especially those in the same industry as Foot Locker are known for not having the same strength

and character in competing forces in distributing or supplying consumer products/wants. The

five forces used in distinguishing companies based on their strength in operating are; rivalry

among competing sellers, substitute products, supplier bargaining power, customer bargaining

power, and new entrants. All these shows how competitive strength a company like Foot Locker

holds in their industry. The purpose for the five forces it allows one in identifying the different

companies involved in the same industry and the pressure that comes with the competition. Also,

the forces look at how strong the competitive pressure that is coming from all five forces.

However, based on all the five forces rivalry among sellers turns to be the strongest and

the one that is often looked at the most among all the five forces model. The reason why the

rivalry among seller is the strongest more especially in the athletic shoes and apparel or the

sports industry in general is because of the extremely high competition between the various rival

sellers due to the decreasing demand in the sports industry. The decrease is caused by consumers

becoming more price sensitive due to the economic conditions which we are facing globally.

Also, there is an extremely high number of competitors in the athletic shoes and apparel industry

which has made it harder for consumers to choose from and made it even harder for the

companies themselves in delivering high-quality products for affordable price in this economic

conditions. Due to all that, Foot Locker competitor such as Wal-Mart will be the ones to have the

rivalry among sellers’ advantage in the athletic apparels and shoes industry because they are able

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in providing consumers with what they want at affordable prices.

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S.W.O.T. Analysis

Potential Strength & Competitive Assets

• Strong Management Team.

• Brand(retailer) Recognition.

• Strong Relationship with Nike Inc.

• Global Expansion.

• Product information based on technology

• Strong Website (e-commerce)

• Variety of sport apparel brands.

• Consumer Loyalty.

Potential Market Opportunities

• Target all ages.

• Celebrity Endorsement.

• New Product Offering.

• Expand Internationally (Africa).

• Expansion of Product Line.

• Acquisition.

• Innovation.

Potential Weaknesses & Competitive Deficiencies

• Poor R&D.

• High Price.

• Overly Dependent on Nike Inc.

• Strong Dependent on Malls

• Less to no Store Brand Products

• Poor Advertising.

Potential External Threats

• High Product Substitutes.

• High Market Entry

• Constant Increase in Competition.

• Wal-Mart Stores Inc.

• Continuous Increase in Fake Products.

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SWOT Analysis Elaboration:

Strong Relationship with Nike Inc.:

Foot Locker retailer as a company with them having a key success in delivering a strong product

line based on brands that consumers are most familiar with can help increase trust among the

company and its consumer because the consumer believes they will always carry such brands.

Foot Locker has always kept a close business relationship with Nike Inc. due to that fact that

Nike keeps on producing new designs of Air Jordan which is what majoring of young consumers

nowadays are looking to purchase, and Foot Locker always carriers the latest designs. Nike Inc.

and Foot Locker has been working hand-in-hand to make sure that they are constantly delivering

attractive products which consumers are searching for.

Variety of Sport Apparel Brands”

Foot Locker doesn’t just carry one type of brands but are a little bit diversify by having other

brands such as Adidas, Under Amour, and including Nike so as to attract consumers who do not

like a specific brand for sports. Every Athletic has their favorite brand which the prefer on using

and it’s always between Nike and Adidas. Foot Locker has opened themselves in carrying high

profile brands so as to create consumer loyalty towards their stores. Carrying too many brands

would increase their competitive level in the sports industry which is why they prefer on carrying

fewer brands so as to get consumer to quickly decide on which brand they’ll be purchasing once

they visit any of their outlets.

Expand Internationally (Africa/Asia):

On the other hand, Foot Locker has been able in expanding their market into Canada, North

America, Europe, New Zealand and Australia which is what has made them into becoming as

successful as they are. It is understood that a company has to move into a market that has

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potential of growth and keeps producing outcomes that will help strengthen the company.

Moving in Asia and Africa would be a great and promising market opportunity for Foot Locker

due to the fact that the company is offering athletic shoes such as basketball shoes and Air

Jordan which could be used as both basketball and fashion shoes. Many people in Asia and

Africa in particular are constantly requesting for Air Jordan because there is a limited market on

these type of athletic shoes in those areas.

Strong Dependent on Malls:

Foot Locker’s continuous depended on mall is good for a short-term profitability, but on a long-

term in could be very risky for their future profit if they continue to heavily rely on malls for

sales. The reason why it could be a risky move for future profitability is because there is a

constant change in social cultural behaviors among consumers which could affect Foot Locker’s

sales. The highly reliance on malls shows that the Foot Locker needs to do new acquisitions so

that they could increase their sales and not just heavily depend on the sales that comes from

malls. Also, relying just on malls alone could risk them in losing a huge consumer based due to

that fact they are not willing to walk/drive to a mall and would instead visit places like Sports

Authority, Wal-Mart, and any of the TJX companies because they are closer. So acquiring new

stores will show consumers that the company is ready and willing on providing them with their

wants.

High Product Substitutes:

Based on the availability of high product substitutes leaves Foot Locker at a great risk because

they don’t have the power within them to increase their price on any products since consumer are

more price sensitive now and have no problem in switch to another company that offers the same

products but at a lower and affordable prices. Due to this reason Foot Locker is forced on finding

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suppliers who are willing on supplying them high quality product but at a lower rate. Foot

Locker has been able of maintaining their price because they have been able of getting suppliers

who are willing on supplying them with quality products at a low cost. Nike Inc. is one of Foot

Locker’s suppliers who are working with Foot Locker in able of keeping customers satisfy so

that they don’t switch to their competitors by offering them products at a price that they afford

and are always willing on coming back.

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Financial Analysis

Leverage – Debt-to-Equity:

Debt-to-equity ratio shows how much money (short-term to long-term) the company has

borrowed in order of funding their assets. If the company’s ratio is over 1.0 that means the

company is borrowing more money in funding their assets and the company as well. However, if

a company’s ratio is below 1.0 that means the company getting more from investor which

signifies that they have a higher advantage in borrowing money. A company like Foot Locker

would prefer to be below 1.0 so as to save margins from expenses in order of competing the high

competitive athletic shoes and apparel industry. Given these points, Foot Locker had a debt-to-

equity ratio of 0.44 in 2012 and in 2013, their ratio was 0.42. However, in 2014, and 2015, their

debt-to-equity ratio was 0.39 and 0.43 respectively. Finally, in 2016, Foot Locker’s debt-to-

equity ratio was 0.48. The industry ratio in 2016 is 0.70 (70%) which means that Foot Locker is

doing extremely good.

Liquidity – Current Ratio:

Foot Locker’s current ratio indicates if the company was or is able of paying off current

liabilities using their assets which could be converted into cash short-term. In 2012, Foot

Locker’s current ratio was 3.79, and in 2013, their current ratio decreased but was still very good

3.71. In 2014 and 2015, the company had 3.75 and 3.53 respectively. Foot Locker also faced a

big decrease based on the previous three years. And in 2016, Foot Locker’s had a ratio of 3.72

still beating the industry’s ratio again on this area. Foot Locker has been able of maintaining a

ratio above 1.0 which means holds liquidity in which they could use in paying their creditors.

Profitability – Gross Profit Margin

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A company’s gross profit margin shows the percentage of the company’s revenue

available in covering their operating expenses and also being able of yielding profit. If a

company’s gross profit margin percentage is high that means they are maintaining a low cost of

goods sold. In Foot Locker’s gross profit margin was 0.32 in 2012. However, in 2013, 2014, and

2015, they had a gross profit margin of 0.33. Finally, in 2016, Foot Locker’s debt-to-equity ratio

was 0.34. The industry ratio in 2016 is 0.47 (47%) which means if the company is almost

reaching the industry percentage average. Also, the Athletic shoes and apparel industry gross

profit margin is very low due to the fact that there is a high level to entry in the industry creating

lots of substitute products.

Profitability – Net Profit Margin:

This area is very important when it comes to looking at a company’s financial

performance based on how much profit the company is earning from profit after tax per

dollar(goods) of sales. The net profit margin is what investors mostly look at in order to

determine how much profit the company is earning. For a company like Foot Locker, they had a

net profit of 0.049 (4.9) in 2012, and 0.064 (6.4) in 2013. Also, in 2014 and 2015 Foot Locker

had a net profit of 0.081 (8.1) and 0.072 (7.2) respectively. In 2016, Foot Locker’s net profit is

0.072 (7.2) still over taking the net profit margin of the industry, with the industry having 2.52.

Impressive numbers for current and future investors planning on investing the company.

Liquidity – Working Capital:

The working capital shows how much money the company has in operating their day-to-

day business. Ever since 2012 to 2015, Foot Locker has had enough fund that could cover their

daily expensive. They had a working capital which are represented in billion $1531 in 2012, and

in 2013, they had $1727. In 2014 and 2015, Foot Locker had 1724 and 1760 respectively. In

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2016, their daily working capital expenses increased to $321.

Strategic Recommendations

Weakness #1 – Poor R&D:

Foot Locker team that is responsible for research and development are not doing their job

to the fullest when it comes to researching new geographic and demographic areas in which the

company can segment their market in based on the consumer demands. Race, education, income

most definitely plays an important part in the segmentation of their market size but in order to

widely and competitively gain an advantage in the sports industry, Foot Locker will have to get

their R&D team very busy because they are many areas abroad and in United States in which

they can expand their market into so as to attract more customers.

Weakness #2 – Less to no Store Brand Products:

Foot Locker Inc. is highly known for carrying other brand names such as Nike and

Adidas which they rely on. Carrying popular brands most definitely gets the company the

customers that they want which helps the company in growing their market size, and financially

as well. Many of these brands are very expensive to purchase which has led consumers to turn to

other alternatives. In order to keep the consumers happy and keeping them satisfy, Foot Locker

should invest in producing their own brands at a lower price which are somehow similar to what

consumers want so as to even attract more consumers to their stores since the company is already

widely popular. Having their own brand name at every outlet will increase their financial

performance and would even give them the opportunity in satisfying consumers based on their

income.

Opportunity – Athlete Endorsement:

In order for Foot Locker to keep their competition in the sports industry at a high, they

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will need to endorse a famous athlete who would be able in helping the company spread the

words about their product offering to potential consumers. Many people especially younger

consumers are willing on purchasing a product especially shoes if it is being advertised by their

favorite athlete or a famous athlete. This strategy is somehow expensive depending on the athlete

and length of which the athlete has been endorsed for. Foot Locker can get someone like famous

like Stephen Curry or LeBron James for a one-year contract and see how that turns out. If it does

have an increase to their sales, then they might want to start thinking of endorsing highly

respected and known athletes.

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Appendix 1 – Strategic Group Map

High

Low

Low Value High

Revenues

Foot Locker, Inc. North America, Canada, Europe, Australia, 7.41 B

and New Zealand

Dicks Sporting Goods, Inc. United States 6.21 B

Sports Authority, Inc. United States, Puerto Rico, Japan 2.65 B

Finish Line, Inc. United States 1.90 B

Wal-Mart Stores, Inc. North America, South America, Canada, 482.1 B

Europe, Asia, and Africa

Dicks Sporting

Goods, Inc.

Finish Line, Inc.

Wal-Mart Stores,

Inc.

Sports Authority,

Inc.

Foot Locker, Inc.

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Appendix 2 – Financial Ratio

Profitability Ratios 2012 2013 2014 2015 2016- 01

Gross Profit Margin % - 31.9% 32.9% 32.7% 33.1% 33.7%

Operating Profit Margin % - 7.58% 7.69% 7.74% 7.81% 7.89%

Net Profit Margin - 4.9% 6.4% 8.1% 7.2% 7.2%

Return on total assets (annualized) % 9.11% 11.7% 15.1% 14.5% 14.3%

Return on stockholders (annualized) % 13.1% 16.7% 21.1% 20.8% 21.1%

EPS-Diluted- 1.80 2.58 2.85 3.56 3.84

Liquidity Ratios

Current ratio** 3.793 3.715 3.753 3.528 3.722

Quick ratio .485 .406 .481 .491 .506

Working Capital (in millions USD) 1531 1727 1724 1760 321

Leverage Ratios

Debt-to-assets ratio .308 .294 .284 .302 .323

Long-term debt-to-capital ratio .060 .052 - - -

Debt-to equity ratio 4.454 4.164 3.970 4.331 4.786

Long-term debt-to-equity ratio 6.398 5.595 - - -

Times-interest-earned ratio 6.242 5.545 - - 8.563

Activity Ratios

Days of inventory 10.19 6.89 6.84 6.38 6.32

Inventory turnover 35.79 35.54 35.83 38.21 38.18

Average collection period 32.455 40.148 55.549 40.323 46.782

Other Important Financial Measures

Dividend yield on common stock 2.1% 2.4% 1.7% 1.5% 1.8%

P/E ratio (quarterly figures annualized) 13.15 15.12 16.48 17.69 16.14

Dividend payout ratio 37% 28% 28% 25% 26%

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References

Foot Locker Inc. (n.d.). Retrieved April 25, 2016, from

http://financials.morningstar.com/income-statement/is.html?t=FL

"Foot Locker Inc." N.p., n.d. Web. 25 Apr. 2016. Retrieved from <http://www.footlocker-

inc.com/pdf/2004/2004AnnualReport.pdf>

Foot Locker., Retrieved from - http://www.footlocker-inc.com/

"FOOT LOCKER INC (FL:New York Consolidated): Company Description." Bloomberg.com.

Bloomberg, n.d. Web. 27 Apr. 2016.

<http://www.bloomberg.com/research/stocks/snapshot/snapshot_article.asp?ticker=FL>.