The award for analyst bad timing has to go to Merrill Lynch who last week downgraded shares of Reebok from BUY to NEUTRAL, citing “the possibility of increased inventory and a growing risk from its increased presence at Foot Locker” as reported by Dow Jones Newswires. Dow Jones also pointed to an increased risk of “increased backlog”.

The analyst expected Reebok to post EPS of 40 cents, missing the 41 cents consensus estimates for the quarter. Reebok met the 41 cents, up 4.1% over the year-ago quarter.

The action by the analyst — and the rumors swirling around the industry about Nike and Foot Locker getting cozy again — served to dilute much of the positive news from Reebok on Thursday as the company reported a 7.2% increase in currency neutral sales and a 28% increase in quarterly earnings when excluding a one-time earnings benefit of 7 cents a share in Q2 2002 from the resolution of prior years' international Customs issues.

Shares were down 4.2%, closing at $33.90 on Friday, up almost 10% YTD.

We’re reasonably sure that other companies, including Nike and adidas, would have seen tremendous benefit — and a nice boost from analysts — from an “increased presence at Foot Locker” and “increased backlog”.

While Reebok’s Rockport subsidiary continues to be troublesome, and the international market, which has not seen the benefits of recent management changes yet, lag behind the U.S. business, it has to be noted that the company’s progress with its namesake brand at the all-important Athletic Specialty channel is nothing short of remarkable.

U.S. Footwear sales were up more than 9% for the quarter, and apparel, driven completely by its Licensed Apparel business, was up over 15% for Q2. More importantly, sales in the Specialty/Sporting Goods sector were up 29% for the period, while mid-market department store sales were off 13%, signaling a real shift in the brand’s positioning.

The other strong indicator was the double-digit increase in futures backlog for footwear, the first such gain in over five years, with performance footwear categories up a stunning 28%. Walking futures were off 41%, which also supports the channel and demographic shift for the brand.

The company has been playing offense in the specialty channel since the Nike/Foot Locker rift that opened up over $400 million in open-to-buy for non-Nike brands.

They have built a solid presentation in basketball, notably Iverson, as well the RBK street lifestyle sub-brand and Classics. The RBK sub-brand grew 15% in the quarter and is now 15% of total sales in the U.S.

But the rumor mill ran amuck last week as it was reported that Nike and Foot Locker are talking a bit again, and that Nike may float additional pairage in Air Force One product to stymie Reebok’s important I3 Pressure program at Foot Locker.

Reebok will ship 2 million pairs of the Pressure shoes this year and 500,000 pairs of the S.Carter collection.
When queried about the potential threat to $60 million in Reebok/ Foot Locker business, company chairman and CEO Paul Fireman quipped, “AF1 is highly vulnerable to I3 Pressure. Nike’s approach (to the category) is very defensive. Trying to twist the arm of the retailer has never worked and won’t work for them now.”

We’re sure Nike will have a different opinion.

Fireman also noted that he is now able to get price parity with Nike on similar products, where Reebok once had to price 5% to 10% less than the swoosh.

RBK Chart

The speculation over a renewed and reinvigorated Nike/Foot Locker relationship may have affected other vendors and retailers, with the other key beneficiaries of the spat taking dips for the week. K-Swiss shares were off more than 6% for the week and adidas dipped 2.7% on the Frankfurt market.

The Finish Line was down 6.0% for the week to close at $21.50, but still up more than 95% for the year. Foot Locker shares jumped 8.3% to close at $14.75 on Friday, up almost 33% for the year.

The report from Merrill Lynch also pointed to potential margin pressure from Foot Locker as the attempt to pull in traffic lost when it started carrying less key marquee product from Nike. The average selling price for Q2 was down versus last year, but up when looking at backlog. Global footwear GM was up over last year.

Margins did decline about 180 basis points for Reebok in the quarter, but the company explained the decline due to 93 basis points in margin last year from the previously mentioned Customs issues gain. The balance of the decline was due to the company’s move to “actively closeout slow moving products and reduce inventories”, Fireman said. Branded apparel sales were down in double-digits for the quarter.

However, Fireman said to expect margin growth to come from apparel, not footwear.


  • At-once orders increased in Q2 versus last year
  • Cancellations and returns were down from last year
  • Will ship a million pair of Premier running collection this year
  • Hexalite technology was sold into value channel for BTS
  • Ad spend in Q2 was 11%, flat with last year
  • Comp sales at Outlets was down again for Q2
  • Net of Outlet sales, comps in U.S. Footwear would have been up 11%

>>> It’s easy for people to say this growth is all from Nike’s spat with Foot Locker, but we think it’s important to remember that it’s what you do with the opportunity that counts…

>>> Nike may have left the door open for Reebok, but Reebok kicked it down. The same can’t be said for a few other brands that had similar opportunities and now have cancels — and close-outs — instead…

>>> We don’t see branded apparel coming back until it comes back for the industry as a whole. Right now licensed is king…

>>> Offense is working. Now bring Tate in on D?