How Foot Locker is waging a comeback after its breakup with Nike

During a recent event celebrating Foot Locker’s 50th anniversary in New York City, it was hard to imagine that the legacy sneaker chain was appearing on bankruptcy watch lists as recently as March.

Grammy-nominated rapper Coi Leray was there to celebrate the company with a special performance of her hit song “Players” as influencers, journalists and handpicked members of the company’s revamped loyalty program sipped on lavender margaritas and champagne cocktails.

Employees – and not just those in the glare of the company’s PR team – gushed about CEO Mary Dillon as Adidas staffers celebrated the company’s new store design, which showcases individual brands instead of mixing them on nondescript shoe walls.

Foot Locker turns 50 while on a bit of an upswing two years into Dillon’s tenure as CEO. Last month, it released fiscal second-quarter results and full-year guidance that beat expectations, as comparable sales grew for the first time in six quarters.

As Foot Locker revamps its sprawling store footprint, and perhaps benefits from some good timing, it’s making strides in winning back its critical brand partners like Nike and Adidas, the latter of which co-hosted the Monday night party and helped secure Leray’s performance.

“Our last quarter was a really good indication that the hard work that we’ve been putting into the Lace Up plan is working, and that makes me feel really, really great, because I really see the next 50 years of growth for Foot Locker and our future,” Dillon told CNBC in an interview, referencing the company’s turnaround plan. “I really think that there’s layers of category growth that we can drive by just making sneakers that much more inclusive, that much more fun, that much more easy to access.”

But as Foot Locker stares down the next 50 years, the company is still at a crossroads and must answer some fundamental questions: can it once again be the market leader in sneakers, and can it not just survive, but thrive, as brands rely less and less on wholesalers?

“With the combination of more direct to consumer from the brands, the deepening of specialists like [Dick’s Sporting Goods], the incursion of JD Sports, Foot Locker still looks risky,” said Neil Saunders, a retail analyst and managing director of GlobalData. “In some ways, they’re just a sort of distributor of everyone else’s products.”

Dick’s has a big private-label business and sells other categories like sporting goods, while JD Sports has strong loyalty programs and a robust fashion business, he said.

“Whereas Foot Locker looks vulnerable because it just doesn’t have all these other strings to its bows,” said Saunders. “The truth is that although they’re getting better, there is still this question: Do we need this specialist sneaker retailer?”

Foot Locker can be traced back to the legendary retailer Frank Winfield Woolworth, whose namesake company branched into footwear in the 1960s and later opened the first Foot Locker in City of Industry, California, in September 1974.

From the beginning, Foot Locker was a mall retailer. Over the next two decades, it opened thousands of stores in malls across the U.S. and abroad.

By the turn of the century, it was the world’s largest retailer of athletic footwear and apparel, with a 20% market share in the U.S., according to a 2002 Forbes report. It was the primary place to buy Nike sneakers and was responsible for 26% to 28% of Nike’s total domestic revenue. Nike accounted for more than half of Foot Locker’s total sales at the time.

“It was a simpler retail world. I think in the years that they were initially really experiencing strong growth, it was as simple as being in the mall, having a large mall footprint and having the right brands and they had that footprint,” said Janine Stichter, a retail analyst and managing director at BTIG, who has been covering the retail industry since 2008. “They were the No. 1 partner of Nike. Nike, at the time, was strong and growing, and I think they were really viewed as like the destination in an environment that was a lot less competitive.”

When Foot Locker’s chief commercial officer, Frank Bracken, joined the company in 2010, the retailer’s relationship with Nike was poised to get even stronger. By the end of the decade, 75% of the products Foot Locker sold were from Nike.

“This was [pre-direct-to-consumer], Foot Locker was definitely ‘most favored nations’ with most of our brand partners at that time, Nike was about to go on a pretty epic run alongside Jordan, and so I actually joined at a really good time,” Bracken said in an interview.

Bracken recalled how from 2012 to about 2018, Foot Locker’s stock rose to record highs as revenue grew at a mid-to-high single-digit compound annual growth rate. But as the 2020s neared, the company got “complacent” and began taking its position as the market leader in sneakers “for granted,” said Bracken.

“[We] got some weak signals about where the industry was headed, from our partners and from competition, and then Covid, you know, paralyzed everybody momentarily and I think we lost some time, candidly, during Covid,” he said. “Competition used it as an opportunity to invest in technology and capability and the business, and maybe we probably stood a little bit too still at that point in time.”

As consumers moved online and away from malls, Foot Locker did too little to update its e-commerce capabilities and its real estate footprint, said Bracken. At the same time, competitors were getting bigger and savvier, adjusting their real estate strategies as malls across America sputtered and died.

In North America, the company let its banners — Foot Locker, Footaction and Champs Sports — overlap too heavily with each other in terms of assortment, location and marketing, and brands “started to take note of that,” said Bracken.

At the end of 2021, Foot Locker was winding down its Footaction business and had acquired WSS – an off-mall athletic apparel retailer that caters to the Hispanic community – to help differentiate itself from competitors.

But by then, it was too late.

Nike, carrying out a new strategy to cut off wholesalers and sell directly to consumers through its own websites and stores, had started reducing the number of sneakers it was selling to Foot Locker, the company said on an earnings call in February 2022. It chose instead to reserve its best products for Foot Locker’s primary competitors: Dick’s and JD Sports.

For a company that relied almost exclusively on Nike, the change was devastating and posed an existential threat. By the end of fiscal 2022, comparable sales had fallen 7.2% in North America. The declines would only mount in the quarters to come.

When Dillon, the former CEO of Ulta Beauty, took the helm of Foot Locker in September 2022, Wall Street breathed a collective sigh of relief. Highly regarded among peers, Dillon was known for her ability to win over brands, and appeared to have the necessary chops to turn Foot Locker around.

“In a way, she soothed investors … they know that she can deliver and they know that she understands retail and the sector and she’s got good operation control and all the rest of it,” said Saunders from GlobalData. “That’s obviously starting to come through a little bit more now.”

In her first major public event as CEO, Dillon hosted an investor day last March where she touted a revitalized relationship with Nike. She pledged the “fruits of our renewed commitment to one another” would begin to show up in results by the end of the year.

She outlined her Lace Up turnaround strategy, which focused on four key pillars: better marketing, a new real estate plan, a revamped loyalty program and an emphasis on online sales.

But as the year wore on, the macroeconomic picture worsened, which hit Foot Locker hard because about half of its customers are considered low income. The company went on to cut its guidance twice, suspend its dividend and delay a key financial target that it outlined at its investor day.

“As a CEO, it’s hard to go out and make a commitment and have to change it, but because I believe so much in the plan and where we’re heading, I felt confident that it was the right thing to do,” said Dillon. “Now I believe we’ve kind of worked past that.”

Beyond the macro situation, the company likely underestimated the challenges it was facing, and how much the Nike breakup would hurt its business, Saunders and Stichter said.

“You don’t really know until you do it how impactful that’s going to be and I think that they thought they’d be able to offset more of that loss more quickly,” said Stichter.

While Foot Locker’s fiscal 2023 turned out worse than it originally anticipated, the company is seeing some of its turnaround efforts start to take hold. While Nike is still its biggest partner, it’s focusing more on other brands, such as upstarts like Hoka and On and legacy incumbents like Birkenstock and Ugg.

Online sales are growing. Foot Locker plans to relaunch its mobile app at the end of the year, and it recently unveiled its revamped loyalty program FLX, which allows customers to earn discounts, access to product launches and perks like free returns.

“We know that we only capture a fraction of this annual sneaker spend that our existing customers spend on sneakers,” said Kim Waldmann, Foot Locker’s chief customer officer. “[FLX] isn’t necessarily about getting you to buy 10 more sneakers per year, it’s an opportunity for us to drive share of wallet consolidation by the fact that you’re getting value back in shopping with us.”

When Waldmann started in the role last year, she learned from consumer research that customers loved having access to a wide variety of brands at Foot Locker’s stores and enjoyed the product knowledge that its employees, known as “Stripers,” had.

“The thing that they wanted to see more from us is like we’re just not top of mind. A lot of consumers just hadn’t seen us in a while,” said Waldmann. “And I think that was really the opportunity to take what is an iconic brand and make it influential and top of mind again, and that’s really the work that we’ve been doing.”

The company is marketing more toward women and has partnered with stars such as Leray, who was part of Foot Locker’s spring style and trend campaign.

Perhaps most critically, Foot Locker is finally doing the work necessary to overhaul its aging store fleet, which is responsible for about 80% of its sales. Since Dillon took over, she’s closed around 500 stores, opened about 200 new shops and remodeled or relocated another 200 or so doors. Earlier this year, Foot Locker unveiled its “reimagined” store concept and its plans to move away from its traditional format, which tends to be two walls of shoes with a middle section used for trying on sneakers.

As more and more brands move away from wholesalers in favor of their own stores and website, the strategy change was critical to Foot Locker’s survival. Its business does not work if it doesn’t have the support of its brand partners, which want to ensure that their assortments are showcased individually – not mixed together with competitors.

“When you talk to a company like On they’re like, yeah, we’re selective about who we sell to, we don’t want to be just another shoe on the wall,” said Stichter. “They’re really investing behind putting more signage and just investing in the displays … that’s what makes the brands want to work with them.”

Since May, Foot Locker has brought the new design concept to at least 80 of its stores, which it says have better comparable sales and margins compared with the balance of the chain. The company is working to refresh two-thirds of its global Foot Locker and Kids Foot Locker doors by the end of 2025, and said 40% of its North American footprint is now off-mall.

The new store approach couldn’t come at a better time for Foot Locker. Over the last year, Nike has begun to walk back its direct selling strategy after acknowledging that it went too far in cutting out wholesalers.

“Nike is our largest partner and they’re the largest in the industry so for us, it’s also about, how do we make sure that we have a really terrific long-term growth relationship with Nike? And I’m proud about the fact that we’re going back to growth [with Nike] starting in the fourth quarter of this year,” said Dillon. “Also … at the same time, Nike has been very public about the role of retailers and the importance of that for them as well so maybe it was good timing, right?”

As Foot Locker looks ahead to the next 50 years, its ability to survive is still up for debate. Nike is at a low point and is cozying back up to the wholesale partners, but when it rebounds, will it cut off those retailers once again?

Absent a robust private-label business, Foot Locker’s success is also highly dependent on the performance of its brand partners, which leaves it with less control over its own destiny than other retailers that have recently made big comebacks, such as Abercrombie & Fitch.

If Nike has a major product launch, it can be a boon for Foot Locker’s sales, but if innovation dries up, Foot Locker will suffer. It has found itself in a similar quandary facing other multi-brand retailers, such as Macy’s, which has also struggled to find itself in a post-mall world.

When asked if Foot Locker can survive another 50 years, GlobalData’s Saunders said the company is the “most at risk of extinction” of its peers. Stichter disagreed.

“One thing we’ve learned is that consumers really do want a multi-brand experience. There are people who go to Nike.com or Adidas.com but people really like having that selection, having the service,” said Stichter. “So there is a reason for a concept like Foot Locker to exist. I think it all just depends on, can they execute well and be one of the preferred places for consumers who are looking for choice.”