Foot Locker’s mojo is back!

With hot sellers ranging from Adidas Yeezy to Jordan, Nike’s Max Air, Fila and Champion, Foot Locker Inc. belted out a 9.7 percent same-store gain in the fourth quarter – its best quarterly gain since the fourth quarter of 2014. Fourth-quarter earnings and 2019 guidance also arrived well ahead of expectations. Some setbacks include the planned closure of SIX:02 and more impairment charges for Runners Point, but a bigger investment has been made into Carbon38, the women’s luxury activewear upstart.

On Friday, shares of Foot Locker closed at $63.07, up $3.55, or 6 percent.

In the quarter ended February 2:

  • Total sales increased 2.8 percent, to $2.27 billion, just ahead of Wall Street’s consensus estimate of $2.19 billion. Excluding the effect of foreign exchange rate fluctuations, total sales for the fourth quarter increased 4.2 percent.
  • The 9.7 percent comp gain came out ahead of guidance calling for an increase in the mid-single digits and the consensus target of 4.5 percent. Results accelerated significantly from the 9 gain seen in the third quarter.
  • Net income reached $158 million, or $1.39 a share, against a loss of $49 million, or 40 cents, a year ago.
  • On an adjusted basis, pro-forma earnings rose 27.3 percent to $177 million, or $1.56 a share, from $139 million, or $1.14, a year ago. Results were well above Wall Street’s consensus estimate of $1.48.

Adjusted earnings in the latest exclude a pre-tax charge of $19 million primarily related to the impairment of Runners Point Group, its Germany-based running chain that been an underperformer since being acquired in 2013, as well as other charges related to litigation and deferred tax assets as well as a tax credit. A year ago, the fourth quarter included a $128 million pre-tax charge, or $81 million after-tax for the pension matter, pre-tax impairment charges totaling $20 million related to write-downs of SIX:02 and Runners Point Group, and tax items that totaled $109 million of expense, largely related to tax reform.

Comps were positive each month, said Lauren Peters, EVP and CFO, on a conference call with analysts. November comps increased mid-single digits, then accelerated to a double-digits gain in December and ended with a gain of high-single digits in January.

Average selling prices were up double-digits. Traffic was down low-single digits overall, with trends in North America better than international. Strong performances were seen across stores and digital across geographies. As a group, stores posted a 5.7 percent comp increase, while digital channels banged out a 29.7 percent comp gain.

As a percent of total sales, DTC increased to 19.1 percent for the quarter, up from 16.1 percent a year ago. The company’s North American divisions all posted positive sales results, led by double-digit comp gains at Eastbay, Foot Locker U.S. and Foot Locker Canada.

Champs also delivered a strong performance, up high-single digits. Kids Foot Locker was up mid-single digits and Footaction posted a low single-digit comp gain. Internationally, the Foot Locker Pacific business had a terrific quarter, generating a double-digit sales gain. Our Foot Locker Europe business continued to improve and was up high-single digits, while Sidestep was down mid-single digits and Runners Point decreased double-digits.

Men’s Running/Classics Drive Footwear Gains

By family of business, footwear posted the strongest sales gain, up double digits overall in the quarter. Men’s and women’s footwear were both up double digits while kids was up high-single digits. By category, men’s running and classic styles posted strong double-digit gains, while men’s basketball was down mid-single digits.

Also on the call, Dick Johnson, chairman and CEO, said the strong growth in footwear was “fueled by the strength of a marquee business that is more diverse than ever, with a great mix of running and basketball styles. This included Yeezy from Adidas, a strong Jordan business and the continuing demand for Max Air. In addition, the strong performance in our women’s and apparel businesses, combined with the breadth and depth of exciting products from brands such as Fila, Vans and Champion, as well as the addition of lifestyle brands such as UGG, illustrates the great work our team has done to extend the reach of our company.”

Apparel “continued to perform well,” according to Peters, posting a mid single-digit increase, with gains driven by strong sales of branded tees and fleece from Champion, Nike and Jordan. NBA apparel, led by Los Angeles Lakers merchandise, also sold through at “good rates.”

Children’s apparel was up strong double-digits. Men’s apparel posted a mid single-digit gain while women’s was down low-single digits. Accessories saw a double-digit comp decline as gains in bags continued to be more than offset by decreases in hats and socks.

Gross margin in the quarter improved 160 basis points to 32.4 percent, and exceeded guidance calling for improvement between by 100 to 130 basis points. The improvement was evenly split between merchandise margins and leverage on relatively fixed buyer and occupancy expenses.

The 80 basis points from increased merchandise margin was due primarily to lower markdowns across footwear, apparel and accessories. Apparel margins improved more than footwear margins in the quarter and actually surpassed them. Said Peters, “This consistent improvement in our apparel performance points to the great work by our apparel team and strong collaboration with our vendor partners.”

Foot Locker’s SG&A rate increased 70 basis points to 19.9 percent in the quarter, below the 100 basis points to 120 basis point increase the company had guided. Said Peters, “Our team did a good job managing our expenses during the quarter and flowing through the stronger top line sales.”

Record Revenues For 2018

The fourth-quarter performance helped Foot Locker notch a recovery year after being impacted by trend shifts the prior year. Sales for 2018 were $7.94 billion, an increase of 2.0 percent and the highest level reached in the company’s history as an athletic business. Excluding currency-impacts, sales increased 1.7 percent. Comps advanced 2.7 percent.

For the full year, gross margin improved 40 basis points to 31.8 percent, better than guidance provided at the beginning of the year. For the full year, SG&A came in at 20.3 percent, up 100 basis points from 2017’s rate. A higher spend reflects the investments made in digital capabilities and logistics and higher incentive compensation. Incentive compensation was about 50 basis points of the increase.

The company’s net income increased to $541 million in 2018, or $4.66 per share. In the 53-week fiscal 2017, the Company reported net income of $284 million, or $2.22 per share. On a non-GAAP basis, EPS totaled $4.71 in 2018, an 18 percent increase over last year’s 52-week, non-GAAP earnings of $3.99.

Inventory turns improved to 4.2 times, the fastest as a public company. Inventory ended the quarter down 0.7 percent, compared to the 7.4 percent total sales increase. Using constant currencies, inventory increased 1.3 percent compared to the 8.8 percent total sales increase. Said Peters, “This outstanding inventory performance, combined with the strong top line results, allowed us to increase inventory turns and ultimately achieve a turn greater than our long-term target of three times.”

Vendor Partnerships Driving Traffic

In his comments, Johnson credited the retailer’s partnerships with vendors for much of Foot Locker’s recent success reaching sneakerheads. He said, “Together, we continued to deliver great products with elevated storytelling and locally relevant experiences.”

He called out the exclusive Tuned Air received from Nike to honor the model’s 20th anniversary as well as Nike’s Home & Away footwear collection that focused on localization efforts in three cities, Houston, Atlanta and Miami. Other partnerships included the Adidas Asterisk Collective, a joint collaboration with Timberland and Champion, and the Puma RX with a 1980s, Transformers theme.

Foot Locker also announced a partnership with Adidas around its Speedfactory initiative that has already seen Adidas come out with the AM4 Detroit model for the opening of Foot Locker’s Detroit Power Store, the first iteration of a Power Store in North America.

Said Johnson, “This store offers full family shopping with the women shop-in-shop and Kids Foot Locker and brings together the excitement of local sneaker culture, art, music, and sport. It features Detroit’s specific products. For example, Detroit inspired Home & Away Air Force 1s, custom art from Detroit artist Desiree Kelly, and it has a dedicated space for events and activations for the sneaker obsessed consumer.”

A second North American Power Store opened outside of Philadelphia at the end of the quarter and Foot Locker now has five in operation. More than a dozen additional Power Stores are expected to be added in 2019, including new locations in Los Angeles, New York and Milan.

Johnson also noted that the company has invested over the last year $124 million into “some innovative young companies at the forefront of change in our industry.” Those companies include GOAT, the sneaker re-seller; a children’s footwear company, Super Heroic; a children’s apparel company, Rockets of Awesome; PENSOLE Footwear Design Academy and Carbon38.

Said Johnson, “We’ve talked on several calls now about the need to evolve with our consumer. We believe these investments will help us do just that, by opening opportunities to leverage innovative technologies, access new business segments and creative talent, and expand the breadth of products and brands that we offer. And ultimately, create a richer ecosystem for our customers that deepens their emotional connections to our brands.”

SIX:02 To Shutter

In women’s, Johnson noted the company plans to wind down its 30-unit SIX:02 banner in coming months. Johnson said the “impact our female customer has on youth culture is undeniable” and Foot Locker will sharpen its focus on reaching the gender at its core banners.

Said Johnson, “We learned much from our SIX:02 team’s efforts, including that when we create unique experiences in dedicated women’s spaces within our current store footprint, she responds well when the spaces are highly productive. That is our go-forward focus, and will include in-store concepts, social, digital and community activations dedicated to her.”

Johnson also noted that Foot Locker had made an additional $10 million investments shortly after year-end in Carbon38, the high-end women’s activewear upstart. Last January, Foot Locker made a $15 million investment to secure a minority stake in Carbon38. Said Johnson, “Of the many opportunities, we believe our strategic investment provides, perhaps the most exciting is the window into the broader women’s consumer set Carbon38 serves, as we strive to accelerate and expand our connection with female shoppers.”

Johnson overall said Foot Locker is seeing “a lot of energy, product innovation and exciting events” to drive growth this year, already highlighted by partnerships with Nike, Adidas and Puma at the recent NBA All-Star Game.

Regarding its outlook for 2019, Foot Locker expects:

  • Comps to increase mid-single digits with mid-single digit gains seen for each quarter. With foreign currencies weaker versus the U.S. dollar now versus the same time last year, sales will have a “slight headwind” in the first half of the year, said Peters. FX headwinds will have the greatest impact on the first quarter. Other possible concerns are the slower pace of tax refunds, combined with the lower average refund size compared to a year ago.
  • Gross margins for the year are expected to improve by 20 to 40 basis points. The improvement is expected to be driven by leveraging buyer and occupancy costs. Peters said, “While we continue to work on initiatives that support full price sell-throughs and logistics efficiencies, our markdown rates are nearing personal bests.”
  • The SG&A expense rate is expected to be up between 40 to 60 basis points in 2019 due to ongoing investments in its digital capabilities. These include investments in personalization, a reimagined membership program, the rollout of global POS software platform in international markets, and the upgrade of international websites. Minimum wage rate increases and continuing upward trends in healthcare costs will also impact SG&A costs.
  • Capital spending will increase $275 million from approximately $200 million in 2018. The spending will include $175 million to improve its store fleet, including opening 80 new stores, with over a dozen new Power Stores, further expansion in Asia and approximately 190 remodels or relocations of existing stores. A total of 165 stores are expected to close with the greatest concentration in Foot Locker and Lady Foot Locker in the U.S., SIX:02, and Foot Locker and Runners Point in Europe.
  • A double-digit percentage increase is expected in EPS. The gain is expected to partly reflect a lower share count, based on share repurchases. The guidance implies earnings in the range of $5.19 to $5.29 versus consensus of $4.95.

Image courtesy Foot Locker