The big news Friday from Foot Locker was hiring Ulta Beauty’s former CEO, Mary Dillon, as CEO. However, the retiring CEO, Dick Johnson, told analysts that the company’s ongoing push to amplify assortments of non-Nike brands continued to progress in the second quarter and back-to-school selling looked promising.

On Foot Locker’s quarterly call with analysts, Johnson said that while overall comps were down 10.3 percent in the quarter due to tough comparisons against stimulus spending in the year-ago quarter, non-Nike sales at its core banners were up high-single-digits with many of its Top 20 vendors posting solid gains.

Sales of Vans and Converse were up over 20 percent, and new Balance and Crocs jumped over 50 percent. Crocs’ growth continued to benefit from collaborations, including a General Mills cereal collaboration. Puma’s exclusive around MB.01, LaMelo Ball’s signature shoe, “continues to drive new heat,” with the model remaining one of Foot Locker’s best-selling shoes, said Johnson.

The apparel and accessories business out-comped the footwear business by 800 basis points, partly reflecting growth of over 40 percent in its controlled brands, including partnerships with Just Don and Melody Ehsani. Performance running has also become a bigger category for Foot Locker. Said Johnson, “We are working with some of the fastest growing brands to help them connect with a younger consumer while also helping us extend our consumer reach.”

Hoka began rolling out in select stores and online this summer, and the company is “extremely pleased with the reception so far in the early days,” said Johnson. The Swiss-running brand On has added European Foot Locker doors, is in 95 locations globally and is seeing “strong results.” Both Brooks and Asics grew more than 40 percent in the second quarter.

Foot Locker’s “elevated partnership with Adidas is still in the early days but is off to a great start, with the brand being given stronger positioning in most of the fleet, enhanced presentation starting to roll out and more collaborative marketing plans are being developed.”

As part of the partnership announced in early May, Foot Locker became the lead partner for Adidas in the basketball category and committed to developing Adidas franchises across women’s, kids, and apparel. The partnership targets over $2 billion in retail sales by 2025, nearly tripling levels from 2021. Said Johnson, “The work on our global partnership continues, and we remain optimistic about where the enhanced relationship will take us.”

The rebalancing is being driven by Nike’s consolidation of its wholesale distribution, including the outright exit of some retail partners as Nike accelerates its direct-to-consumer (DTC) push. In late February, Foot Locker announced that Nike’s portion of Foot Locker’s sales would decline to about 55 percent by the fourth quarter of 2022, down from approximately 65 percent in the 2021 fourth quarter and 75 percent overall for 2020. Foot Locker will also receive less “high heat” or marque products, such as retro Jordans.

However, Foot Locker has said the shift is only accelerating long-overdue efforts to add more diversity to offerings to establish a more relevant mix.

“Our strategic direction of expanding our customer base through our diversified product offering is supported by three key pillars,” said Johnson. “First, consumers want choice, and they value a multi-brand experience. Second, we are under-penetrated in virtually all of our brands outside of our top vendor. And third, we have superior brand equity in the marketplace that we are leveraging to capture new customers across our portfolio of banners. Our second quarter results continue to validate those three pillars and demonstrate that our increasing ability to grow our customer base by bringing the consumer a broader and richer product offering across our brands, categories and channels is yielding positive results.”

Foot Locker’s second-quarter earnings declined sharply versus year-ago levels but topped Wall Street’s consensus estimate. The sneaker giant nonetheless now sees full-year results arriving at the lower end of previous guidance due to the expected sales impact on inflationary pressures, particularly being seen among its lower-income customers.

Johnson said, “After a strong start in May, we saw trends slow in June, which continued through mid-July. As trends soften, the promotional environment has become more intense, especially in apparel but also in footwear. The back half of July trends started to pick up meaningfully, especially in our earliest back-to-school markets. As we look to the third quarter, we are excited about back to school’s strong start so far as well as the energy we are bringing to the market this fall and holiday seasons with upcoming releases like LaMelo Ball’s MB.02, the Trae Young shoe as well as new introductions from New Balance and key launches from Jordan and Yeezy. One of our strengths is the ability to win in key buying periods like back to school and holiday when there is a real call to action. Our view is that the back-to-school season will be strong. But we do see increased uncertainty from then until the holiday season begins given the more challenging macroeconomic environment.”

In the second quarter ended July 30, sales decreased 9.2 percent, to $2,065 million, in line with Wall Street’s consensus estimate of $2.1 billion. Excluding the effect of foreign exchange rate fluctuations, sales decreased 6.1 percent.

Net income fell to $94 million, or 99 cents per share, from $430 million, or $4.09, for the corresponding prior-year period. On a non-GAAP basis, EPS fell 47.4 percent to $1.10 per share from $2.09 per share in the prior-year period and ahead of Wall Street’s consensus estimate of 90 cents.

Gross margin declined 340 basis points year over year, driven mainly by higher markdowns, as the promotional environment started to normalize after last year’s unusually favorable backdrop, followed by supply chain costs and occupancy deleverage. SG&A deleveraged 210 basis points, driven mainly by labor inflation and the sales decline.

The comp decline of 10.3 percent reflects tough comparisons against stimulus spending in the year-ago quarter and inflationary pressures that slowed traffic in June. Second-quarter sales were up 16.4 percent compared to the 2019 second quarter.

By month, comps were down high-single digits in May, off low-teens in June and down high-single-digits in July as sales improved in early back-to-school regions.

Comparable store sales fell 6 percent in the quarter, with traffic in its global fleet up low-double digits and conversion down approximately 10 percent. Compared to 2019, while brick-and-mortar traffic was down, conversion is meaningfully higher, “showing a high level of intent from our customers when they visit stores and the strong execution by our merchandising and store teams,” said Andrew Page, EVP and CFO.

Digital penetration was 16.9 percent in the second quarter this year, down from 20.1 percent last year but above the 14.3 percent level in 2019. Units were down by high-single-digits in core banners, while average selling prices fell on higher apparel penetration and a decline in footwear.

North America comps overall were down 16.1 percent given last year was still benefiting from heavy fiscal stimulus in the U.S. Foot Locker Canada was up low-single digits while Foot Locker U.S. was down low-double digits and Kids Foot Locker and Champs both down high teens. Foot Locker Europe’s comps grew 4.5 percent, with strength across markets, particularly in France. APAC comps were up 17.7 percent as store closures in Australia and parts of Asia were lapped.

While not in the company’s comp base, WSS and Japan-based Atmos continued to perform strongly in the quarter. WSS, which contributed $137 million for the quarter, comped down low single digits, well ahead of other U.S. banners despite fiscal stimulus having a meaningful impact on that business and being the most exposed to recent low-income consumer weakness. Atmos, which contributed $48 million for sales in the quarter, grew low-double digits versus their results last year.

As part of a planned succession process, Johnson will retire as president and CEO, effective September 1. He will continue as executive chairman through January 31, 2023 and remain a senior advisor until early April 2023 to facilitate a smooth transition.

Mary Dillon, who most recently served as executive chair of Ulta Beauty after serving as CEO for eight years, takes over as president and CEO and a member of Foot Locker’s Board, also effective September 1. Previously, Dillon was president and CEO of U.S. Cellular, the global chief marketing officer of McDonald’s and held leadership roles at PepsiCo.

Johnson said the leadership change comes as Foot Locker sees”ongoing momentum” in the transformation of the business.

“I believe now is the right time to complete the CEO transition,” said Johnson. “We are thrilled that Mary will join the Foot Locker team and are confident she is the ideal person to lead the company into the future. She has established a remarkable track record over a career spanning more than three decades that has included leadership roles at companies including Ulta, McDonald’s and PepsiCo. Mary has a passion for serving customers and her expertise in developing attractive brand portfolios and delivering a superior experience is deeply aligned with Foot Locker’s priorities and strategy. She is an inspiring leader who has not only been responsible for growing businesses but has also shown a commitment to fostering inclusive and collaborative cultures that are impactful for organizations and customers alike. We expect a smooth transition with a continued focus on our strategic imperatives and business goals.”

The updated outlook for the year calls for the following:

  • Sales to be down 6 percent to 7 percent, versus previous guidance calling for sales to be on the upper end of down 4 percent to 6 percent. The change was attributed to the sale of Eastbay’s team sports business to BSN Sports and foreign exchange pressure.
  • Comparable sales are to be down 8 percent to 9 percent versus previous guidance calling for comps to be at the upper end of down 8 percent to 10 percent.
  • Gross margins to be in the range of 31.1 percent to 31.2 percent, up from 30.6 percent to 30.8 percent previously. The change was due to better occupancy trends and supply chain costs, partially offset by higher markdowns.
  • The SG&A rate to range from 21.3 percent to 21.4 percent, up from 20.7 percent to 20.9 percent previously. The change was due to ongoing inflation pressure.
  • Non-GAAP EPS to range from $4.25 to $4.45 versus being at the upper end of $4.25-$4.60 under previous guidance.

Photo courtesy Foot Locker