PRINT THIS STORY:

CHANGE TEXT SIZE:

ATHLETIC SHOE CHAINS STRUGGLE THROUGH SLUMP

By Rodger Brown

Well, that other shoe has finally dropped. Foot Locker has hired Lehman Bros. to explore a possible sale. Following a 30-year expansion — thanks largely to the jogging and fitness craze that began in the 1970s and to the marketing magic of the Michael Jordan name — the $18 billion athletic footwear market has hit the wall. “There’s no real growth,” said John Shanley, a footwear and athletics analyst at Bala Cynwyd, Pa.-based Susquehanna Financial Group. Sales across the sector have barely budged this year, and the performance of the top three chains — Foot Locker, Finish Line and Athlete’s Foot — have slipped or stayed flat over the past year.

The diagnosis is simple. Young people under 25 make up nearly 50 percent of the athletic footwear market, according to the National Sporting Goods Association, and for the past few years that market has shifted from the big and bulky basketball shoe toward a lower-cut, European-style shoe.

This fashion shift would not matter much if the prices were all the same. Unfortunately for the footwear retailers, that is not the case. “The kids are moving away from the higher-priced technical footwear toward more moderately priced nontechnical product,” Shanley said. “It’s a fundamental change in the whole athletic footwear environment, because you have to sell three times as many pairs of Vans or Skechers for $40 than you would a Nike Air Force 1 for $120. And that’s not happening.”

What has been happening is that athletic footwear retailers are throwing elbows and tugging jerseys in a struggle where nothing is certain. Take Indianapolis-based Finish Line. When the news broke in June that Genesco, a Nashville,Tenn.-based shoe and hat conglomerate, had accepted a $1.5 billion buyout offer from Finish Line, Wall Street did not respond the way Finish Line might have expected. But then Finish Line scored its coup. The company’s industry-leading competitor, Foot Locker — whose $5.4 billion in 2006 sales dwarfed Finish Line’s $1.3 billion — was rebuffed twice by Genesco as it sought to buy the hot company; when Foot Locker announced it was no longer pursuing Genesco, Finish Line broke from the pack and made the deal.

“With Genesco, we will enhance our strength in athletics and gain an immediate presence in new and growing retail categories to further diversify our business,” said Alan Cohen, Finish Line’s CEO and co-founder, when the deal was announced. “They went after Genesco because its two largest divisions are Journeys and Hat World,” Shanley said. Finish Line desperately wanted to add Journeys to its portfolio, he says, because, whereas Finish Line’s sales dropped 5.7 percent last year, Journeys’ sales rose 6 percent. “And at Hat World, which just sells caps, the profit margin on those is astronomical.”

Finish Line looked to the deal for help in the shifting market, but Wall Street wasn’t buying. Genesco’s stock rose following the announcement, but Finish Line’s fell 5 percent. By the third day after the announcement, Finish Line’s shares had plunged 22 percent. By late July the stock had sunk to its lowest level in five years.

Wall Street might be concerned about the enormous debt Finish Line is now saddled with, but analysts say the company had little choice. “The only way you’re going to grow is taking share away from somebody else,” Shanley said. “Sometimes it makes more sense to buy a competitor rather than try and drive them out of business.”

In March, just as Foot Locker was making its fruitless play for Genesco, the Port Washington, N.Y.-based NPD Group research firm released a study on the athletic footwear industry. The report confirmed what salespeople have known for the past two years and explained why Genesco’s hipper, lower-cut merchandise mix had made the Nashville company the one everybody wanted to dance with. “There’s a shift in what consumers want in their active footwear,” said Marshal Cohen, NPD Group’s chief industry analyst, when the study was released. According to the report, consumers have begun to prefer styles that are less performance-oriented (the “high tech” running or basketball shoes are in this category) and more fashion-oriented, such as the low-cut, casual shoes influenced by skateboard culture.

Last year footwear sales in that skate category jumped 45 percent over the year before, whereas the running, tennis and basketball shoe categories all suffered declines. “There is a clear shift by consumers from casual athletic shoes to fashion designs for casual,” Cohen said. “Athletic footwear retailers and manufacturers need to take a careful look at this trend and focus on what consumers are asking for.”

They are trying, but it is not easy. Last fall Foot Locker launched Footquarters in an attempt to offer cheaper footwear to a less performance-oriented customer. That did not work, so when Foot Locker announced the sale of itself and the shutting of about 250 of its 4,000 stores, it also said it would close Footquarters and convert the spaces to Foot Locker or Champs Sports outlets.

The Athlete’s Foot, the chain that claims to be the first to launch the specialty athletic footwear sector in 1971 with a small store in Pittsburgh, is also undergoing a market-driven reinvention under new ownership, NexCen Brands, which bought the company last year.

In June NexCen Brands CEO Robert D’Loren said Athlete’s Foot would update both its store design and its merchandising strategy. “Our new merchandising system empowers our store owners to meet the demands of all those customers, from the suburban runner to the urban skateboard enthusiast,” D’Loren said in a press release.

Athlete’s Foot is primarily a franchise business, and offering modular merchandising units “allows franchisees to make the decision that’s right for their markets,” D’Loren said. This approach offers store operators a selection of four formats — called performance, retro, classic athletic and fusion (that last one incorporating extreme sports). The Athlete’s Foot has also changed its corporate logo, which now reads “taf.” So despite the uphill race, it looks as though the athletic shoe chains are still pressing for that tape.