Summary:
1. This paper analyzes the value chain of the sports shoes industry, the positioning of Fulak, and its impact on the persistence of the business model.
two。 Evaluate the influence of Nike Inc and Adidas and put forward opinions on their DTC (direct to consumer) marketing style.
3. Give value to profitability and evaluate investment opportunities.
Fulak, a professional retailer of sports shoes and sportswear (Foot LockerFL) reported second-quarter results in August last year, and its shares fell to $30 after weak performance led to a significant sell-off by investors. In this article, analysts analyze the fundamentals of the business model, value current profitability, and assess investment opportunities as of today.
Fuller's simple and powerful business model
Fuller's business is very simple: convert high-quality products from suppliers into high-quality consumer experiences, and make considerable profits in the process of transformation. Fuller's products are sneakers, clothing and accessories. The suppliers are first-class brands such as Nike Inc, Adidas, Vance, Puma and Anderma. Fashion-conscious girls and boys are willing and able to spend more than $100 on a pair of sneakers.
Fuller also provides planning (approved by Fuller) and convenience (premium real estate and DTC) to make the storytelling business stand out, allowing it to sell high-end goods at high prices and achieve unparalleled efficiency.
Foot Locker's business model, source: Investment Works
If you look closely at Foot Locker's business model, you will find that the healthy operation of enterprises is mainly driven by two factors:
1.The satisfactory degree and activity of the product classification provided by the supplier.
2.The efficiency and cost efficiency of translating products into user experience.
The first factor is exogenous and is not controlled by Fulak.But on average, healthy competition among high-quality suppliers ensures the steady circulation of expected products. Suppliers' product weaknesses were one of the main reasons for last year's weak performance, but management expects product circulation to improve in the second half of the year.
The second factor is directly controlled by Fulak.This is indeed an important business. The company is making significant investments in e-stores (new websites and application platforms, new brand loyalty programs) and brick-and-mortar stores (from shopping malls to changing locations on flagship streets) to continuously improve the experience.
In order to assess the durability of the business model, you need to be familiar with the value chain of the high-end sports footwear industry.
The retail price of sports shoes has increased to about 100% of the wholesale price. This figure covers lower-priced retailers such as Dick's Sporting Goods, Sports Direct and JD Sports.
For high-end products, the number may be even higher. A pair of Nike Inc sneakers made at $40 and wholesale to Fulak for $90 can retail for as much as $185. This means that when Fulak is transforming this wholesale product into a highly convenient, emotional experience, cool, exciting, fun, belonging and the emotional bearing of the group, this will be more valuable than the wholesale product itself!
Unfortunately, discounts are a common practice for retailers to manage inventory. When considering reducing the average price, the value added by the retailer is only about 1 / 2 of the value provided by the supplier.
What are the main factors behind the dynamic discount mechanism?There are two factors, and these two factors are exactly the same as the factors that promote the healthy operation of enterprises as we outlined earlier: the satisfactory degree and activity of product classification (exogenous factors of Fuller) and the efficiency and cost efficiency that Fuller "transforms" them into experience.
About the durability of business models:Suppliers of brands such as Nike Inc and Adidas are responsible for most of the design, production and advertising budget, but it accounts for only half of the total retail price.
Why does the supplier allow such a transaction?
One reason is that current deals allow suppliers to be immune to most of the discounts from retailers.Some retailers' profit margins can be seen as compensation for the volatility (last year, Fulak shares lost more than 35 per cent, while Nike Inc shares rose 20 per cent, but Fuller's mistakes were mainly due to Nike Inc's lack of product range).
Another reason is to put 40Dollar lifeless leather and synthetic fabrics are "transformed" into 180The process of the dollar experience is not easy.The supplier can make a pair of traditional sneakers for $24 and sell them in Amazon.Com Inc or department stores for $65. For those basic commodities, commodity distribution channels are adequate. But selling $180 sneakers requires a lot of marketing. When it comes to high-end sneakers, no retailer can do this last step of transformation better than Fuller. In fact, Fulak has been doing it for decades and has an industry-leading return on investment and profitability. Until last year, its earnings growth continued to set records.
In fact, suppliers have been trying to reduce their dependence on retailers in order to distribute their products in other ways.DTC e-retailing has promoted the development of websites such as Nike Inc and Adidas, which is how they reduce their dependence on retailers. Because customers who search for Nike Inc sneakers on Fulak's website have no advantage over those who search directly on Nike Inc's website, customers are more likely to choose their own brand's website to buy goods. In fact, the weakest data point in Fuller's first-quarter report was the performance of DTC. Electronic investment may eventually lead to a rebound, but we are cautious about Fuller's online sales potential.
Most suppliers also operate brick-and-mortar stores of their own brands. The value proposition of Fulak is even more eye-catching. Physical stores are Fuller's core business, although suppliers do not disclose the performance details of their own physical stores (except for comparable sales and total DTC), but even considering the supplier brand stores, we believe thatThe sales efficiency of Fulak's physical stores is unparalleled in the industry.。
We are skeptical of Fulak's online solution. The physical storefront contributes a lot to the operation of Fulak, and we have greater confidence in diversified marketing channels. Low-cost in-store inventory delivery, online payment for in-store pick-up and in-store return available on the same day are some examples.
Another important issue is that consumers always have a demand for differentiated multi-brand retailers.Fans of a particular brand may like to patronize their favorite brand stores directly, but most customers may prefer stores that offer all the major, brand-selected stores. At any point in time, multi-brand retailers also allow the portfolio to be transferred to the supplier with the best performance.
What is more noteworthy is that the current business model of high-end footwear vendors depends on being able toHigh-end sneakers are sold at prices above US dollars.Without high pricing, Nike Inc and Adidas cannot afford multimillion-dollar endorsements, sponsors and marketing campaigns, which are necessary to improve the competitiveness of their brands and maintain their volatile pricing power. Nike Inc and Adidas are completely trapped by their model, and they will not be able to extricate themselves from it except at the cost of high economic losses.
The current operating situation of Fulak
Based on 119 million diluted outstanding shares as of the first quarter of 2018, Fuller generates distributable cash flow of more than $520 million a year and its share price is $4.37 per share.
This is based on conservative assumptions. In particular, the figure is lower than both after-tax operating income (NOPAT) and free cash flow (FCF) for the past four years, and below the 2018 forecast.
For the whole of 2018, the company's outlook calls for "double-digit earnings per share growth", up from $3.99 a share last year. Due to a conservative 10% year-on-year increase in earnings per share, net income in 2018 was $522 million, or $4.39 per share, slightly higher than our assumption.
Last year, after-tax operating income was $529 million and free cash flow was $539 million. In the past three years, both indicators have improved significantly.
Taking into account the 8 per cent discount rate, the value of a perpetual annuity of $520 million a year is $6.5 billion, or $54.60 per share. At the end of the first quarter, $826 million of distributable net cash was added to the balance sheet, increasing the share price to $7.326 billion, or $61.60 per share. According to conservative estimates, the intrinsic value is about 10% higher than the current share price.
Outlook: the development prospect of the retail industry is not optimistic, but there is still some possibility.
The retail industry is undergoing an unprecedented transition. Consumer expectations have never become higher, but retailers do not have the technical means to understand and achieve consumer expectations.
Some retailers will not be able to survive the transition. But it is also unknown why retailers who understand their target customers and implement differentiated value-added services to consumers may not survive or even develop further.
Analysts believe Fulak is a survivor.
In the market segment with positive long-term trends (positive lifestyle, sportswear, leisure and comfortable clothing, urbanization, etc.), Fulak is an excellent management and shareholder-friendly enterprise. At present, the business model of high-end footwear and clothing suppliers depends on first-class retailers such as Fulak. They try to reduce their dependence on DTC marketing, but they still rely on them for the time being, and we believe that there is always a strong market demand for multi-brand high-end planning products.
With a price of $55 a share, Fuller is no longer an unsustainable operation (such as last November, when it was sold at $30 a share). But it's still valuable. Fuller's cash market value last year was about 10% lower than its current value, which translates to financial results in 2017, bringing the share price to nearly $70 a share.
Editor's note: the writer is an analyst team from the US stock investment website Seeking Alpha (Investment Works)
(this article is produced by Futu Information compilation team, compiled / Sheng Rong, proofread / Jiang Wenwen)