Shares of Foot Locker, Inc. rose about 16 percent Wednesday after the sneaker juggernaut reported better-than-expected third-quarter results, encouraging sales trends so far in the fourth quarter and what Mary Dillon, president and CEO, hailed as several “early wins” in the company’s Lace Up transformation program.
“While we recognize that we have work ahead of us, I’m encouraged by the progress we’ve been making in this reset year,” said Dillon, the former CEO of Ulta Beauty who took over as Foot Locker’s CEO last September, on an analyst call. “I continue to be confident that we’re executing the right strategies as we simplify and focus our business and invest in the capabilities that will enable Foot Locker to be the best omnichannel retailer at the intersection of sneakers and sneaker culture, as we say on our new brand platform, the heart of sneakers.”
In the quarter, comps declined 8 percent, including a 3-point comp headwind from the repositioning of its Champs Sports banner more toward the “active athlete.” EPS reached 30 cents a share, down from adjusted EPS of $1.27 a year ago but ahead of Foot Locker’s expectations as well as Wall Street’s consensus target of 23 cents.
“Trends in the quarter accelerated from our first half run rate driven by a strong back-to-school and our Kids Foot Locker banner,” said Dillon. “We also delivered sequential improvement in our conversion rates across stores and our digital channel outperformed our expectations, including a positive trend in October. Importantly, we continue to exercise disciplined expense management and made further progress in executing our cost savings plan.”
Based on the results, Foot Locker slightly raised its sales guidance for the year while lowering its EPS guidance to “balance early successes in our Lace Up initiatives with the uncertainty we’re seeing in the external environment and our internal inventory goals.”
So far in the fourth quarter, Foot Locker has been pleased with sales trends. Dillon said, “Over the Thanksgiving week period, we saw solid traffic levels and conversion gains in our stores and online. While customers responded to our competitive offers, we also saw nice gains in ticket and basket size, as our customer is willing to pay full price when the product is new, compelling, and trend-right.”
Among the “key wins” Foot Locker saw in the quarter, according to Dillon, were:
- Enhanced online performance with higher conversion levels and double-digit gains in new customer acquisition;
- Improving brand awareness levels “suggesting our top-of-funnel marketing and brand building efforts are resonating”;
- Stabilizing conversion trends in stores as product flows resonate and in-store execution improves;
- Champs Sports’ banner comps outperforming original plans from the start of the year; and
- Early positive response to its loyalty pilot launch in Canada.
Foot Locker Invests In Basketball
Dillon also highlighted Foot Locker’s improved positioning around the sport of basketball with its agreement to serve as an official league marketing partner in the U.S.
“Foot Locker in the NBA have a nearly 25-year history of working together and we’re thrilled to be building on that in the years to come with this new partnership,” said Dillon. “This season, you’ll see Foot Locker and the NBA collaborate around exciting content, on-court virtual signage featuring our iconic striper logo and activations around marquee events such as the NBA All-Star Game. We’ll also be focused on social engagement and we’re excited about reaching the NBA’s 84 million followers on Instagram along with other platforms with our brand-building and commerce-driving content. We’ll focus on creating collaborative content highlighting our basketball products and point of view. The NBA will be connected directly into our loyalty FLX program and will provide additional benefits and access to our customers in new and exciting ways.”
Foot Locker also saw an “amazing” response to its basketball-themed “Heart of Sneakers” global brand platform with over 1 billion media and influencer impressions since the campaign’s global launch. Dillon said, “Our first campaign with the platform as our holiday campaign called “Hype for the Holidays,” which includes the star-studded roster of NBA All-Stars. We know that when we win basketball, it is good for us and importantly, it’s good for our brand partners.”
Also aligned with the basketball focus is the Home Court in-store experience at the flagship Foot Locker banner. Dillon said, “This is a unique multi-branded basketball experience with elevated merchandising, storytelling, and experiences. While still early days, and only a handful of our top basketball doors, early response by our customers has been very positive and we’re continuing to invest in the concept.”
Expanding Sneaker Culture
Dillon updated progress on Foot Locker’s Lace Up strategy, announced this past March, that includes four strategy pillars, starting with “Expanding Sneaker Culture By Serving More Sneaker Occasions, Providing More Choice And Driving Greater Distinction.”
The first priority largely focuses on “making sure we’re strong partners to all the brands we work with,” she said.
With Nike, by far its largest partner, Foot Locker continues to build growth plans around basketball, kids, and sneaker culture. Said Dillon, “We believe the future of basketball is bright for Foot Locker and we’re encouraged that the culture of basketball also continues to connect with consumers through models like the Air Force 1, Air Jordan 1, and Nike Dunk.”
Dillon said retro footwear sell-throughs “remained” solid in the third quarter, albeit with lower units compared to last year. Foot Locker has an exclusive on the 25th Anniversary the launch of the Nike Tuned Air franchise that particularly resonates with EMEA sneakerheads.
With Adidas, Foot Locker continues to build momentum with Terrace and Skate franchises, including the Samba, Gazelle, and Campus; and also has an exclusive on Adidas’ Anthony Edwards basketball shoe launch this December. Dillon said Foot Locker is pleased with the recent launch of Puma’s LaMelo 3 model and is “excited” about Puma’s renewed collaboration with Rihanna.
New Balance continued its strong recent growth trend with sales across Foot Locker’s banners surging well over 100 percent year-over-year in the third quarter with multiple franchises performing well across men’s, women’s, and kids. Dillon said, “We continue to see door expansion opportunities in New Balance as we build on the share gains we’ve seen in this exciting brand.”
Within performance running, On is now in 420 doors, ahead of earlier plans for 350 doors this year as roll-out plans were accelerated to “meet the strong consumer response to their unique and innovative product.” Hoka added 50 doors since last quarter, bringing the total door count to 150 ahead of the holidays. Said Dillon, “We remain bullish on our partnership with these exciting newer brands and we are planning for even more door count expansion across these two brands next year.”
Also in performance running, “strong gains” were being seen with Asics and Brooks. In lifestyle offerings, Crocs and Ugg are showing gains. The diversity of Foot Locker’s brand mix outside of Nike increased to 36 percent of sales from 32 percent last year, with a stated goal to reach over 40 percent by 2026.
Power Of The Portfolio
Foot Locker’s second imperative under the Lace Up plan, “Power Of The Portfolio,” focuses on transforming its real estate footprint through new formats and shifting off-mall, while further differentiating banners.
In the third quarter, Foot Locker opened or converted 13 new Foot Locker Community and Power Stores across the globe, ending with 198 across both formats. Comp trends in these locations continue to outperform the remainder of the fleet with higher levels of traffic, conversion and ticket. A double-digit e-commerce halo is also seen in the markets around these locations. All-in, the new formats now represent approximately 13 percent of Foot Locker’s global square footage, up from 10 percent last year, making progress against the 2026 target of 20 percent.
At the same time, off-mall increased to 36 percent of North American square footage, up 3 points from a year ago and also making progress towards the goal of 50 percent by 2026. WSS, its off-mall banner, is on track to open 26 net new locations this year, including five new locations year-to-date in the Miami market.
Lastly, as part of the real estate transformation, 14 underperforming stores were closed during the quarter, including its three U.S. Atmos stores with Atmos’ U.S. website being wound down in January. Said Dillon, “As we think about the Lace Up framework of simplifying and investing to grow, this applies to Atmos as we focus its growth in its core market” of Japan.
At Champs, while comps declined by approximately 20 percent in the third quarter, the banner is tracking better than originally expected at the beginning of the year. Said Dillon, “The team is getting even sharper with Champs’ positioning towards the active athlete including positive early results from store refreshment in the third quarter that’s planned for an accelerated rollout into year-end. With a more distinct store experience and an even sharper viewpoint on its assortment buys into the spring, we remain optimistic about Champs Sports’ potential in the marketplace.”
Deepening Customer Relationships
The third pillar, “Deepening Our Relationship With Our Customers,” focuses on building brand equity, reaching a broader set of customers and enhancing its loyalty program and overall CRM [customer relationship management] capabilities.
“On building brand equity, we are better articulating and celebrating our brand proposition via our brand-building, storytelling, and marketing,” said Dillon, citing the strong response to its new global brand platform and “Hype for the Holidays” campaign.
She added, “We are already seeing brand perception lift against key attributes such as trend, style, and service since the media launch. This work we’re doing around greater top-of-funnel marketing, including incremental marketing investment, is driving consideration and customer acquisition at strong incremental returns.”
On loyalty, 23 percent of sales in the third quarter were through its current loyalty program, compared to 22 percent last year. The launch the FLX Cash test pilot in Canada in September is delivering a rise in active members, higher average order values versus non-loyalty customers, and a significant number of FLX cash redemptions by first-time users, “suggesting broader appeal as we refocused it to offer benefits beyond primarily launch access,” said Dillon.
Foot Locker plans to roll out the updated loyalty program to the remainder of North America in 2024 and globally in 2025.
The last pillar of the Lace Up plan, “Be Best-In-Class Omni,” relates to improving the company’s banners’ digital presence as well as better integrating channels with each other. Digital penetration in the quarter increased to 17 percent, up 150 basis points year-over-year when excluding Eastbay, which was closed late last year. The goal is 25 percent penetration.
For the second consecutive quarter, combined digital comps were positive at Foot Locker and Kids Foot Locker banners in North America. Comps accelerated to positive for all global e-commerce in the month of October. Omnichannel Investments include reduced friction points and improved experiences and features. Moving forward, Foot Locker plans to continue to upgrade the site experience with enhancements to product listing and detail pages through elevated content, merchandising, and badging. A new Foot Locker app will roll out in 2024. The product launch experience will also be improving by driving greater connectivity with the stores and greater loyalty integration.
At the store level, new training and tools were introduced for store associates, or “stripers,” who are already showing signs of improving engagement and conversion in stores. The rollout of upgraded handhelds to all North American associates was completed to improve inventory visibility, access to product information and the ability to check customers on the selling floor.
“To sum up, while the retail environment remains dynamic, our teams are focused on staying nimble, particularly through this important holiday season,” concluded Dillon. “Even as we focus on supporting our topline and closely managing our inventory through the near term, we’re continuing to go after the big future opportunities we see for our business. I’m confident we are evolving Foot Locker to truly be all things sneakers and to be a competitive omni-channel retailer that can drive sustainable and profitable long-term growth and shareholder value.”
Photo courtesy Foot Locker