Speaking Wednesday at the Bernstein Strategic Decisions Conference, Foot Locker officials said elevated inventory levels across the marketplace and consumer caution are now driving promotional activity above pre-pandemic levels with margin pressures expected to continue through 2023.
“They’re elevated from pre-COVID levels,” said Frank Bracken, EVP and chief commercial officer, when asked about promotional levels. “Initially, when we came in, the plan for the year was closer to sort of 2019/2018 levels of promotion. But clearly, we’ve seen that that’s not going to work given what’s going on from a macro standpoint and just the overall supply levels and the inventory in the marketplace.”
On May 19 while reporting first-quarter results, Foot Locker slashed its guidance for the year as April failed to deliver a pick-up in sales as expected and sales weakness continued into May.
Under the updated guidance for 2023:
- Sales are now expected to decline 6.5 percent to 8.0 percent versus a decline in the range of 3.5 percent to 5.5 percent previously.
- Same-store sales are expected to be down between 7.5 percent to 9.0 percent, versus down between 3.5 percent to 5.5 percent previously.
- Gross margins are expected to come in the range of 28.6 percent to 28.8 percent from 30.8 percent to 31.0 percent previously. Gross margins were 31.9 percent in 2022.
- Adjusted EPS is now expected to range between $2.00 to $2.25 compared to guidance between $3.35 and $3.65 previously.
Foot Locker also said some mid-term targets, including increasing sales to $9.5 billion by 2026 from $8.5 billion in 2022, will take longer than expected as 2023 results miss plan. The targets were delivered on March 20 at its Investor Day which saw Foot Locker unveil its aggressive “Lace Up” strategy.
“It’s been disappointing that demand has softened as much as it has,” said Mary Dillon, who took over as CEO and president at the start of 2023, at the Bernstein conference.
She said that towards the middle of last year, some softening at lower and middle-income consumers was being seen, but Foot Locker also saw “great resilience” from consumers that drove earnings and sales above Wall Street expectations.
“That was very encouraging as we got into this year,” said Dillon. “We knew that there was pressure because tax refunds were looking to be lower than a year ago and in fact they were, but we expected the strength that we saw over the holiday to come back post that period of time.”
However, as Foot Locker moved into April when tax refunds have less impact, demand noticeably declined, especially with lower-income consumers, and May’s trends turned “worse.”
Dillon noted other retailers have also called out the slowing trends while noting that Foot Locker is more exposed than many retailers to lower-income households. Forty-seven percent of the company’s shoppers have $50,000 or less in household income.
On the positive side, she noted that shoppers are coming in for “key moments,” such as shopping occasions like Mother’s Day or Father’s Day, or when a hot launch product arrives. However, she sees consumers overall being “a little bit more choiceful” over their purchases amid inflationary pressures.
“Even though inflation is abating, certainly what people are paying – if you look at the household budget and what you pay for groceries, what you pay for rent – are higher than they were a year or two ago,” said Dillon. “We also know that there were COVID-related benefits that have gone away like Snap [that offered] some help with grocery bills. The notion of maybe having to pay student loans again is also really on the horizon. We also see other retailers calling out this pressure on the discretionary spend that we don’t expect lifts anytime soon. But at some point, we expect that will get better.”
Foot Locker increased its promotional activity late in the first quarter and more so in the second quarter to reduce elevated inventories and the promotional activity is expected to continue through the balance of the year. Dillon said at the conference, “Certainly, there’s a supply and demand dynamic and so we’ve got to help drive more demand to really begin to get after the inventory that’s built up.”
Foot Locker ended the year with inventories higher 30 percent year-over-year Dillon said Foot Locker felt it “may be an asset” as strong holiday sales indicated strong demand. However, Foot Locker ended the first quarter with inventories ahead 25 percent, putting the company off course on its target to end 2023 with slightly-lower inventories year over year.
“We’re not alone,” said Dillon of moves to increase markdowns to clear inventories. “This is happening across the sector. But things are cyclical and as we look towards the latter part of the year, we’ll see some strength in what we expect in terms of launch [product] and expect that that will begin to take some of that pressure off. But we do expect that will continue for at least a couple quarters, maybe the whole year.”
Asked if Foot Locker consumers are trading down from higher to lower priced products, Bracken believes Foot Locker’s consumers are looking for a better “price/value.” He noted that due to inflationary pressures on inputs prices, some footwear styles might have risen to $170 from $150 over the last 18 months and consumers at choosing a similar shoe for $100. He said, “They’re looking for that value and deal.”
He also said consumers have again been conditioned to expect deals as promotions returned last fall to clear elevated inventories at the time.
“They’re being a little savvier with their pocketbook,” said Bracken. “They’re waiting. So, something that was $20 off a week ago and then at full price, they’re not going to come in and sort of fall for that, if you will. They’re going to wait that one out. So that’s why we’ve sharpened the pencil on promotions. We’ve got a really good promotional cadence in plan for the rest of the year. Alongside that, we’re going to continue to mix in innovation and newness and the big holiday moments to make sure that we can capture that demand and capture as much full price and margin realization as we can throughout the year.”
Foot Locker officials spent much of the presentation discussing the “Lace Up” strategy which includes narrowing the focus of the business to opportunities with the strongest potential. As part of that effort, Foot Locker is converting its Asia business to a licensing model. The further streamlining of the business followed recent efforts to close its Sidestep and Footaction banners and merge Eastbay with Champs Sports.
“We just simply said, ‘Let’s simplify the business,’” said Dillon. “Let’s invest in the business and grow the business and the areas that you know we’re focused on around expanding sneaker culture. So, this notion of being authentic sneakers to people that are starting to rediscover or discover this category.”
The plan includes expanding non-Nike brands from about 30 percent of the portfolio to 40 percent by 2026 with growth from brands including Adidas, Puma, New Balance, Hoka, On, and Hey Dude. The plan also calls for increasing exclusive products from 15 percent of sales to more than 25 percent by 2026.
A major focus will be to better address consumers’ wide range of “occasions” for wearing sneakers to reach beyond sneakerheads and take advantage of the ongoing shift toward casual dressing. The goal is that by 2026, more than 30 percent of the business will consist of performance, casual and under $100 models.
Dillon sees the casual trend continuing “for a long number of years.” She said, “We sit back and realize we’re in a category that’s a growth category with a lot of tailwinds and Foot Locker is the OG [original] of this category. And when people think about sneakers, Foot Locker is the retail company, the only retail company that really rises to the top as a known and loved brand, aside from the brands themselves. So, part of the whole premise of our Lace Up plan is to continue to drive distinction and innovation of our retail brand within the context of growth.”
Photo courtesy FootLocker