Foot Locker: Mary Dillon ‘understands the consumer,’ analyst says

UBS analyst Jay Sole joins Yahoo Finance Live to discuss the leadership change at Foot Locker and the brand's relationship with sneaker manufacturers Nike and On Running.

Video transcript

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BRIAN CHEUNG: Shares of Foot Locker kicking up following the company's beat on earnings, although the retailer said it may only hit the lower end of its previous forecasts on sales. All of this as the company also announced a major change of leadership at the top.

For all the latest, let's bring in Jay Sole, Retail Analyst for UBS. Jay, great to have you on the program this morning. You know, you had an interesting note prior to earnings that said "sentiment is just low on this stock." And indeed, we're seeing shares popping. Is that the reason? Because again, the earnings guidance not necessarily all that great.

JAY SOLE: Well, Brian, I think you touched on it. And thanks for having me on the show. Foot Locker's guidance, although it didn't really change very much, I think expectations amongst investors was actually that they actually would have to lower guidance even more. So the fact that they're generally maintaining their guidance is a positive.

And to your point, sentiment was so low that it's helping the stock. But I think the other news, and you touched on the major CEO transition, is probably the bigger driver of the stock today. Foot Locker has had a great CEO, Dick Johnson, but now they're going to transition to Mary Dillon who has an excellent reputation on Wall Street, and that's probably the biggest driver of that stock this morning.

BRIAN CHEUNG: Yeah, Jay, let's talk a little bit more about that. Mary Dillon, formerly of Ulta Beauty, at the top of that company, and Dick Johnson, as you mentioned, stepping down. What does Mary bring to this company? Because a lot of people on their surface might be wondering, well, what does beauty supplies have to do with selling shoes and other apparel?

JAY SOLE: Well, it's a really good question, and this came up on Foot Locker's conference call. And I think the convention-- the basic view is that she brings a wealth of experience from not just Ulta, but also from her other experiences at McDonald's and Pepsi, just has a great ability as a leader, as a businessperson, as someone who just understands the consumer. And I think that's really something-- those are important characteristics in a CEO and, obviously, something that the market is telling us they really like.

BRIAN CHEUNG: Yeah, and again, that transition, I think, going to happen September 1. But tell us about the other kind of things facing the fundamentals of this business. When we talk about Nike, right, that was the massive reason why shares sold off so sharply earlier in the year when they announced that the share of their total purchases that come from Nike was going to be a lot smaller than it's been in the past. How important is specifically Nike to the Foot Locker story, especially as we kind of consider the change in management?

JAY SOLE: Well, Brian, you're getting to the heart of the issue here is that Nike's incredibly important to Foot Locker. Last year, Nike was around 70% of all Foot Locker sales, so Nike, Jordan, Converse, everything from Nike Inc, so obviously, it's a very important relationship. And as you mentioned, Nike is really focused on driving their direct consumer business, getting consumers to shop through their own websites, their own apps, and their own stores.

And really, that's causing a market share shift from Foot Locker towards Nike. And I think the mission for the next CEO is to sort of stop that shift, to create a closer partnership with Nike so they can continue to get some of Nike's latest and greatest sneakers to sell to consumers rather than letting Nike just keep it for themselves.

So that's the big challenge. I think the market, one of the reasons sentiment has been so low, is that the market's worried that Nike's just going to continue to take more share from Foot Locker going forward, even more than it already has. So we'll see what happens. But the market's been nervous about that. I think today, there's a little bit of hope maybe that can change.

BRIAN CHEUNG: Yeah. And again, that's something I imagine that's impacting a lot of other retailers as well. But I want to shift to maybe how Foot Locker could be compensating for that because there was another announcement from Foot Locker this morning, I'm sure a very busy morning over there at corporate, they're teaming up with Fanatics to try to significantly broaden the officially licensed fan gear available online to Foot Locker shoppers. I mean, tell us about how impactful you think that deal is going to be and whether or not it's emblematic of the other strategies that Foot Locker might deploy to make sure that the inventory that they have is something that's appealing to their shoppers.

JAY SOLE: Well, certainly, Brian. And I think it's exactly emblematic of the larger strategy that Foot Locker has to try to diversify their business into other brands and businesses, not just Nike. For example, On is a really hot up-and-coming running shoe brand, and that's the brand that Foot Locker is now selling more of. HOKA is a really strong up-and-coming running footwear brand that Foot Locker is doing a lot more business with.

Foot Locker has numerous initiatives to really extend their business to connect more deeply with consumers and try to offset the impact of what Nike-- of Nike reducing a little bit of their inventory allocation this year. So Foot Locker's certainly not standing still. They've really got a lot of different initiatives going on, and Fanatics is just one of them. So I would say that bodes well for Foot Locker going forward that they do have all these things that are happening.

BRIAN CHEUNG: All right. Again, shares of Foot Locker up almost 20% this morning. UBS Analyst Jay Sole, thanks so much for the time. Have a great weekend.