Foot Locker is making a comeback after its split with Nike.

• This month marks Foot Locker's 50th anniversary, and the company is taking steps to secure its future in the years ahead.
• CNBC interviewed CEO Mary Dillon and other C-suite executives about the successful strategies and how the new stores are boosting sales.
• In order to regain its position as the top sneaker retailer, Foot Locker must distinguish itself from its rivals and effectively implement its new tactics, according to analysts.

It was surprising to see the legacy sneaker chain on bankruptcy watch lists just months before the 50th anniversary celebration in New York City.

Coi Leray, a Grammy-nominated rapper, performed her hit song "Players" at the company's celebration, while influencers, journalists, and members of the revamped loyalty program sipped on lavender margaritas and champagne cocktails.

Staff members, not just those in the spotlight, praised CEO Mary Dillon as they celebrated the new store design that highlights individual brands rather than blending them on plain shoe walls.

Dillon's two-year tenure as CEO of Foot Locker has seen the company experience growth, with fiscal second-quarter results and full-year guidance that surpassed expectations. Comparable sales have increased for the first time in six quarters.

Foot Locker is revamping its store footprint and making strides in winning back its critical brand partners, including Nike and Adidas, who co-hosted the Monday night party and helped secure Leray's performance.

"Dillon stated in an interview with CNBC that the last quarter was a positive sign that the hard work put into the Lace Up plan is paying off, and this makes him feel great because he sees the next 50 years of growth for Foot Locker and the future. Dillon believes that there are many layers of category growth that can be achieved by making sneakers more inclusive, fun, and easy to access."

As Foot Locker looks ahead to the next 50 years, the company must address crucial questions: can it regain its position as the market leader in sneakers and adapt to a changing retail landscape where brands are increasingly relying on direct-to-consumer sales?

"According to Neil Saunders, a retail analyst and managing director of GlobalData, Foot Locker's continued riskiness is due to the increasing direct-to-consumer sales from brands, the growth of specialists, and their role as a distributor of others' products."

While Dick's has a substantial private-label business and sells various categories such as sporting goods, JD Sports boasts strong loyalty programs and a thriving fashion business, he stated.

"While Foot Locker appears vulnerable due to lacking other sources of revenue, the question remains: Is a specialist sneaker retailer truly necessary?"

From mall legend to has been

The origins of Foot Locker can be traced back to the iconic retailer Frank Winfield Woolworth, whose company expanded into footwear in the 1960s and opened the first Foot Locker store in City of Industry, California, in September 1974.

Since its inception, Foot Locker primarily operated as a mall retailer. Over the course of two decades, the company expanded its presence by opening numerous stores in malls both domestically and internationally.

In 2002, Foot Locker was the world's largest retailer of athletic footwear and apparel, with a 20% market share in the U.S. It was the primary destination for Nike sneakers and accounted for 26% to 28% of Nike's total domestic revenue. At the time, Nike made up more than half of Foot Locker's total sales.

"In the early years of their growth, retailers thrived by being located in large malls, offering the right brands, and having a strong footprint. They were Nike's top partner, with Nike being a strong and growing brand that attracted customers to their stores."

In 2010, when Frank Bracken became Foot Locker's chief commercial officer, the retailer's relationship with Nike was already strong and was expected to grow even stronger. By the end of the decade, 75% of the products Foot Locker sold were from Nike.

At the time, Foot Locker was the "most favored nations" with most of our brand partners, Nike was about to embark on a "pretty epic run alongside Jordan," and I joined at a "really good time," according to Bracken.

From 2012 to about 2018, Foot Locker's stock reached record highs as revenue grew at a mid-to-high single-digit compound annual growth rate. However, as the 2020s approached, the company became complacent and took its position as the market leader in sneakers for granted, according to Bracken.

"Our partners and competition provided weak signals about the industry's direction, and then Covid temporarily paralyzed everyone. We lost some time during this period, and competition took advantage of it to invest in technology and capability, leaving us standing still."

Bracken stated that Foot Locker failed to adapt its e-commerce capabilities and real estate holdings as consumers shifted online and away from malls. Meanwhile, competitors became more adept and adjusted their real estate strategies as malls across the country declined.

Bracken noted that Foot Locker, Footaction, and Champs Sports in North America had overlapping assortments, locations, and marketing, causing brands to take notice.

In 2021, Foot Locker was phasing out its Footaction business and bought WSS, a retailer that specializes in athletic apparel for the Hispanic community, to distinguish itself from competitors.

But by then, it was too late.

Nike has started reducing the number of sneakers it sells to Foot Locker and instead reserves its best products for Dick's and JD Sports, as part of a new strategy to cut off wholesalers and sell directly to consumers through its own websites and stores.

The decline in comparable sales in North America, which fell 7.2% by the end of fiscal 2022, posed an existential threat to the company that relied almost exclusively on Nike. The declines would only mount in the quarters to come.

A new leader arrives

In September 2022, Foot Locker welcomed Dillon, a highly respected former CEO, as its new leader. Known for her ability to win over brands, Dillon was believed to have the skills to revive Foot Locker.

"Saunders from GlobalData stated, "She has been able to calm investors as they recognize her ability to deliver and comprehend the retail sector and maintain effective operation control. This is becoming increasingly evident.""

In her first major public event as CEO, Dillon hosted an investor day last March where she announced a revitalized relationship with Nike. She promised that the "fruits of our renewed commitment to one another" would start showing up in results by the end of the year.

Her Lace Up turnaround strategy centered on four main components: enhanced marketing, a new real estate strategy, a revamped loyalty program, and a stronger focus on online sales.

As the year progressed, the macroeconomic situation deteriorated, negatively impacting Foot Locker, which relies heavily on low-income customers. The company was forced to revise its guidance twice, halt its dividend, and postpone a crucial financial objective that it had previously announced at its investor day.

"As a CEO, it's challenging to make a commitment and then change it, but because I strongly believe in our plan and direction, I felt confident in my decision," said Dillon. "Now, I believe we've moved past that challenge."

The Nike breakup likely underestimated the challenges the company faced, according to Saunders and Stichter.

Stichter stated that the true impact of an action can only be determined after it is performed, and they believed they would be able to offset more of the loss more quickly than they actually were.

Signs of a turnaround

Despite Foot Locker's fiscal 2023 not meeting its original expectations, the company is beginning to see some of its turnaround efforts take effect. While Nike remains its largest partner, Foot Locker is now focusing more on other brands, including upstarts like Hoka and On, as well as legacy incumbents like New Balance and Ugg.

The mobile app of Foot Locker will be relaunched at the end of the year, and its revamped loyalty program FLX offers customers discounts, product launches, and perks like free returns.

"Kim Waldmann, Foot Locker's chief customer officer, stated that the company only captures a small portion of the annual sneaker spending of their existing customers. However, the company's focus with FLX is not to encourage customers to buy more sneakers, but rather to consolidate their shopping with Foot Locker by providing value through the program."

Last year, when Waldmann began her role at Foot Locker, she discovered through consumer research that customers valued the wide range of brands available in the store and appreciated the product knowledge of the "Stripers," Foot Locker's employees.

"Waldmann stated that consumers had not seen the brand in a while, which made it less top of mind. However, he believed that this presented an opportunity to revive the iconic brand and make it influential again."

The company has partnered with stars such as Leray and is now marketing more toward women, as part of its spring style and trend campaign.

Dillon, who took over Foot Locker, has been working to revamp its store fleet, which accounts for 80% of its sales. She has 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 new store concept and plans to shift away from its traditional format, which typically features two walls of shoes with a middle section for trying on sneakers.

The shift in strategy was crucial for Foot Locker's survival as more brands are moving away from wholesalers and towards their own stores and websites. Brands want to ensure that their assortments are showcased individually, not mixed with competitors.

"Stichter stated that when talking to a company like On, they emphasize their selectivity in choosing whom they sell to, as they aim to stand out from the competition. They invest heavily in signage and display to attract brands that want to work with them."

By the end of 2025, Foot Locker aims to refresh two-thirds of its global Foot Locker and Kids Foot Locker doors. Since May, the company has introduced a new design concept in at least 80 of its stores, resulting in better comparable sales and margins compared to the rest of the chain. Additionally, 40% of Foot Locker's North American footprint is now off-mall.

The new store approach is well-timed for Foot Locker as Nike has recently reversed its direct selling strategy, recognizing that it had gone too far in cutting out wholesalers.

"Dillon stated that Nike is their largest partner and the largest in the industry. As such, it is crucial for them to maintain a long-term growth relationship with Nike. Dillon expressed pride in the fact that they are returning to growth with Nike, starting in the fourth quarter of this year. Additionally, Nike has emphasized the importance of retailers to their business, which may have contributed to the timing of their growth plans."

The battle between extinction and survival

The future of Foot Locker remains uncertain as it prepares for its 50th anniversary, while Nike is currently struggling and rekindling its relationship with wholesale partners. However, when Nike recovers, will it maintain its ties with retailers or cut them off again?

The success of Foot Locker is highly dependent on the performance of its brand partners, leaving it with less control over its own destiny than other retailers that have recently made big comebacks, such as .

If Nike launches a major product, it can benefit Foot Locker's sales, but if innovation declines, Foot Locker will suffer. This predicament is not unique to Foot Locker; other multi-brand retailers, such as Dick's Sporting Goods, have also grappled with the challenges of a post-mall world.

GlobalData's Saunders believes that Foot Locker is the "most at risk of extinction" among its peers, while Stichter disagrees.

"Stichter stated that consumers desire a multi-brand experience, which is why they visit websites like Nike.com and Adidas.com. However, consumers also appreciate having a selection and service, which is why Foot Locker exists. The success of Foot Locker depends on its ability to execute well and become a preferred destination for consumers seeking choice."