While the good news here cant be heralded as the “Miracle on 34th Street” just yet, Foot Locker is showing signs that it is reaping some benefits from the improving overall retail picture.
As we reported here two weeks ago (SEW 0332), Foot Locker saw comps for Q2 ending July decline 4.4%, with the U.S. Foot Locker (down high singles) and Champs (down low singles) business dragging down the total numbers as the dot-com business and Europe gained in the mid single-digit range. Total sales rose 3.4%, but decreased 0.9% on a currency-neutral basis.
As we have seen elsewhere, the business started to improve in late July and continued its momentum into August. Management said that all major divisions, including U.S. Foot Locker, Lady Foot Locker and Champs, are now comping positive for August.
“Clearly, athletic footwear and apparel back-to-school trends have improved,” said Banc of America Securities analyst Robert Ohmes. “In addition, it sounds like the sneaker business in general is either picked up and also become a little less promotional,” said Ohmes.
In the U.S., the private label and licensed apparel sales continue to show very healthy sales increases. The demand for replica NBA and NFL jerseys continues to gain momentum, driven by Reeboks exclusive deals with both leagues.
Footwear sales trends in the U.S continue to be led by the Classics category and cuts across most of the key suppliers. The trend continues to drive average selling prices lower, with Q2 showing the third consecutive quarter the ASP declined due to the high demand for Classic product under $80. Year-to-date pairs in the domestic stores are essentially flat with last year.
Quarter over quarter average price points are expected to level off later this quarter as they anniversary against the current lower prices established last year as the Nike Marquee product started drying up and retro and Classic product took hold. Foot Locker sees a developing trend for brown-colored sneakers, with the BTS sell through trending above expectations.
Improved gross margins for second quarter also led to an improving earnings picture as the retailer met analysts expectations of 24 cents per share. The company also said it expects gross margin will continue to improve from a year earlier due to a softer promotional environment in the United States.
The direct-to-consumer business, which includes footlocker.com and Eastbay, continues to contribute a higher percentage of the companys sales and profits. Direct to customer sales increased 5.8% to $73 million during Q2 with operating profits jumping 33% to $8 million, or 11% of sales.
Foot Locker Europe's operating profit margins remain well into the double-digit level. Back-to-School sales there are seen as “very solid”. FLE added 20 stores during the spring season for a total of 397 stores. Look for FL to continue to aggressively expand in this market, with an additional 34 stores slated before the holiday season and ending 2003 with approximately 430 stores across 12 Western European countries.
Former Eastern Bloc countries and Russia are also targeted for growth. The company said it added 38 stores during the latest quarter, including new stores in Portugal and New Zealand.
Inventory levels at the end of the second quarter were 6.9% above last year. This inventory increase primarily reflects the stronger foreign exchange rates in Europe, Canada and Australia and higher inventory levels, primarily in Europe, to support the planned third quarter store opening program.
Inventory excluding the impact of foreign exchange rate changes, was 4.7% higher than last year at the end of the second quarter, and “adequate” to drive sales for the back to school period. Additionally aged inventory “remains well within the company standards”.
Foot Locker said it expects to earn 31 cents to 33 cents a share in the current third quarter, in line with analysts' average estimate of 32 cents and the 31 cents EPS posted in the year-ago period.
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