“Only buy something that you would be perfectly happy to hold if the market shut down for 10 years.” Buffett
Phil Knight started out as a retailer under the banner of Blue Ribbon Sports. Knight was selling Tiger brand running shoes. Fairly quickly, due to negotiations over product design, product pricing and other factors, Knight realized he didn’t want to be at the mercy of Tiger shoes.
Knight’s experience as a retailer can serve as a backdrop for a discussion of Foot Locker.
I am only going to write a few thoughts on Foot Locker because it is an easy pass for me.
Foot Locker is a retailer for a variety of sporting good brands, predominately Nike. Approximately 71% percent of products came solely from Nike.
The main issue here is Foot Locker serves as an intermediary between Nike and its customers.
Let’s sketch out some rough numbers for Foot Locker and its largest competitor.
FL did $7B in sales in 2015 and its largest competitor did $6B in sales. Fast forward 5 years and Foot Locker did $8B in sales and its largest competitor now has over $12B in sales.
Foot Locker’s largest competitor is actually Nike’s direct to consumer business. Nike’s total revenue grew from $31B to $39B in those past 5 years, but its direct to consumer unit grew $6B. In other words, most of the growth at Nike is coming from competing directly with Foot Locker. I can see how the Nike relationship does have a place, but I just don’t want to invest in a company that is so tied to its customers when the customer is exploring and taking up its DTC channel so thoroughly.
I have only mentioned FL’s largest customer, Nike. However, the FL’s other large suppliers are all pursuing a similar direct to consumer strategy.
This brings me back to Buffett’s quote. If the market were closed for 10 years, I would not want to own Foot Locker with its business competing directly with Nike.
I want to point out something about Foot Locker because many people will make money during this 10 year period. Imagine Nike doesn’t completely crush Foot Locker, but over the next 10 years, its valuation remains around $4B. At times, Mr. Market will value Foot Locker at a mere $2B and it will look extremely cheap. At other times, Mr. Market will value Foot Locker at $6B and it will look expensive. Buyers at $2B and sellers at $6B will make money. But, that’s a tough game to play, timing the valuation of Foot Locker with a perennial axe hanging over its head from its largest supplier.
I want to focus on a company that is worth $4B right now, but if the market is closed for 10 years, the company will be worth $20B when the market opens back up in 10 years. This difference in investing style allows me to take make fewer decisions and avoid the opportunity for mistakes.