Trading Nation

Does the sneaker industry have a basketball problem?

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Will the lack of demand for basketball shoes start to deflate footwear stocks?

On Friday, shares of Foot Locker fell more than 4 percent after the company reported earnings, despite beating analyst estimates. The drop came after Foot Locker executives addressed slowing sales of basketball products on the fiscal fourth-quarter earnings call.

"The rumored death of basketball where our leadership position is most widely recognized has been greatly exaggerated," Foot Locker's chief executive, Richard Johnson, said on the call. "Although growth in the basketball category during the quarter was modest relative to running," strength in other brands has offset the slowdown, he said.

However, the consequent fall in the company's stock may be very telling for the broader industry, according to David Seaburg. Cowen and Co.'s head of sales trading said Friday that the weakness in basketball sales may leak into other names such as Nike.

"Nike represents roughly 75 percent of the inventories at Foot Locker," Seaburg said Friday on CNBC's "Trading Nation." And "that's specifically the highest-margin business for Nike. You've got to question it and look a little into this ... it seems to me this could be a cautionary signal."

Despite the drop in Foot Locker shares, Nike rose incrementally on Friday, having gained more than 5 percent for the week. Seaburg said the lack of investor reaction is surprising, especially given the rise in Nike's inventory and markdowns in online sales.

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"Inventory is up, discounting occurred and then you're hearing the commentary for Foot Locker about their projections for demand," he noted. "It scares me a little bit."

Some analysts are more optimistic about the industry's ability to adapt to new demands. Camilo Lyon of Canaccord Genuity wrote on Friday that Foot Locker's solid quarterly earnings report underscored the company's ability to change from one category focus to multiple.

Additionally, "we believe [Nike] is working to improve its Lebron product offering as evidenced by it having replaced the head of signature basketball late last year," Lyon wrote in a research note. "As such, we would expect new designs to hit stores in fall '16 which could reaccelerate growth in this segment of basketball."

Lyon has a "buy" rating on the stock with an $81 price target. Foot Locker shares tumbled Friday to trade at $64.14.

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