Europe and the Internet continue to outpace gains in Foot Lockers U.S. retail stores in the fourth quarter even as the company starts to anniversary lower average selling prices, negative comps and the reduced Nike product on the floor in the year-ago period. The retailer expects to see Europe surpass the billion dollar mark this year and said that the exclusive 20 Pack program from Nike “sold well in December and January” which they see as an “encouraging sign” given their substantial commitment to the program going forward.
The conversation here is now quite different from a year ago when management was pointing to poor sales of $100+ marquee as the reason for its cut back and cancellation of Nike product. This year, Foot Locker has eased off of the promotional pedal and now sees “some pressure” on the lower-price sector of the business. Although they said they “tilted” footwear purchases this to higher price points to “meet the developing trend”, the average selling price for Q4 was still “slightly lower” than the year-ago quarter.
As we reported in SEW_0306, Foot Locker posted a 3.9% comp store sales gain for the three-month period through January versus a 0.9% comp decline in the year-ago period. Management told SEW that December was the best month of Q4 with comp store sales increasing in “mid single digits”, while November was in “very low singles”. January was seen as “in-between” with comps in the “strong low singles”.
February, which is part of the companys fiscal Q2 business, was said to have a “low single-digit” increase.
The U.S. “Locker” business, which includes Foot Locker, Lady Foot Locker and Kids Foot Locker, had a “solid” mid single-digit increase on a comp store basis for the fourth quarter, with Kids posting the strongest results. Champs was up in “low singles” and the DotCom business, including Eastbay, had a “low single-digit” increase, which was said to be driven by the “highly promotional, highly profitable” Internet business.
Management said the Internet business “continues to grow”. For the full year, direct to customer revenues increased 4.9% to $366 million, or 7.7% of sales, and had a 53% increase in operating profit.
Serra sees “strong double-digit” growth in the e-commerce sector of the business, but the catalog side “continues to be off”. He acknowledged its primarily an issue of ordering preference for the kids as they share the Eastbay catalog with friends and then go on-line to order product. He sees the business getting to $500 million over the next couple of years.
Europe comps were up in “mid singles” on a business that Serra said has “very rich” operating profits. While the Continent is “essentially a regular priced business”, the U.K. is said to be “highly promotional”. Foot Locker is expanding its DC in Europe “in excess of 50%” to meet the growth needs of the region.
Stronger categories included Classics and Boots and the Brown Sneaker trend seen at B-T-S continued to show strength. Foot Locker saw “strong gains” in Licensed Apparel and Private Label. Branded Apparel was the lone category described as “weak”, but the company cautioned that “fashion low-profile footwear” is “beginning to soften” in favor of more performance product. Serra also said that white classics will “begin to slow down”.
Total sales for the company were up 9.8% to $1.3 billion for the fourth quarter. Excluding the effect of the weaker dollar, sales were up 5.6% for the period. Net income for the quarter was up 24.6% to $71 million, or 47 cents per diluted share, versus $57 million, or 39 cents per diluted share, in the year-ago period. Income from continuing operations increased 47.9% for the quarter.
The results beat FLs February estimate that earnings would be at the high end of their previously stated range of 41 cents to 45 cents per share.
Gross margins for Q4 were up 50 basis points to 30.9% from 30.4% in Q4 last year. Inventory at year-end was impacted by the weaker dollar and would have increased 7.2% on a currency-neutral basis. At year-end, Foot Locker's cash balance grew to $448 million, up 25% from the 2002 year-end cash balance of $357 million. Net of debt, the company's cash position increased $112 million versus last year.
Management said they will have “another strong year selling classic footwear, including retro and retro-looking products”. Foot Locker also expects Nike, inclusive of Converse, to represent 38% to 40% of the business in 2004. Serra said the company will “have somewhat of a full re-engagement” with Nike “beginning in the middle of second quarter”.
The licensed apparel categories are also expected to “remain very solid”, but Serra did admit there has been “somewhat of a slowdown”. He looked to new Reebok jerseys for two Nike athletes, LeBron James and Carmelo Anthony, to stir sales in the fall.
Foot Locker expects see “mid-to-high single digit” increases in total sales during 2004 and EPS growth in the 10% to 20% range for Q1 and full year.
