Shares of Foot Locker, Inc. collapsed about 25 percent in mid-day trading Friday after the sneaker giant axed its guidance for the year and indicated it would miss medium-term targets only set in March as sales have dropped sharply below expectations. Mary Dillon, CEO and president, told analysts, “Since our Investor Day in the face of increasing macro headwinds, our sales trends have slowed significantly, just in the past month and a half, which will have an impact on our near-term results.”

Dillon said that following a better-than-expected holiday season, Foot Locker has seen a consumer retrench attributed in part to inflationary pressures that are impacting discretionary spend, including on athletic footwear. Foot Locker also believes that spending dollars are being directed more towards services and away from products  “as consumers are forced to be more choiceful on how to spend their money,” she added.

Dillon noted that Foot Locker was already predicting comps this year would be impacted by a number of headwinds, including the reset of its partnership with Nike, the transition of the Champs banner to focus more on the active athletes’ segment, and the shutdown of Eastbay. Also impacting sales in the near term was expected to be a 10 percent decline in average tax refunds that has an outsized impact on Foot Locker’s business given that the company over-indexes to a lower-income consumer.

April was expected to see a pickup in sales as the tax refund drag lessened and due to a more favorable launch calendar during the month, but trends didn’t improve as much as expected and weakness continued into May.

She said, “As a result, we increased our promotional activity late in the first quarter and more so in the second quarter and we expect that level of promotional activity to continue through the balance of the year, which will allow us to clear inventory and bring more newness to our customers.”

2023 Outlook Slashed
Overall comps at Foot Locker were down 9.1 percent in the first quarter ended April 29, slightly below expectations. By month, comps were down double-digits in February and March and were down low-single digits in April with the company’s non-launch business “meaningfully below” expectations.

As a result, Dillon said Foot Locker increased promotional activity late in the first quarter and more so in the second quarter “and we expect that level of promotional activity to continue for the balance of the year, which will allow us to clear inventory and bring more newness to our customers.”

She added that while she’s confident that Foot Locker’s Lace Up Strategy unveiled at the Investor Day event will “return us to sustainable growth next year,” some mid-term financial 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.

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.

Q1 Comps Drop 9 Percent
For the first quarter, total sales slid 11.4 percent, to $1,927 million, short of analysts’ consensus estimate of $1.983.4 million. On a currency-neutral basis, sales decreased 10 percent.

Gross margin declined 400 basis points driven by a combination of higher markdowns against still historically low levels in the prior year, heightened promotional activity late in the quarter, as well as a pick-up in theft-related shrink.

SG&A increased 110 basis points to 22.4 percent of sales with savings from a cost optimization program more than offset by deleverage on the sales decline, inflation, and investments in front-line wages and technology.

Net income decreased to $36 million, 38 cents a share, from $133 million, or $1.37, a year ago. On an adjusted basis, net income fell 57.4 percent to $66 million, or 70 cents, from $155 million, or $1.60, and was below Wall Street’s consensus estimate of 78 cents.

Lifestyle Running Worst Performing Footwear Category
By category, footwear comped down high-single digits in the first quarter while apparel and accessories fell mid-teens.

Frank Bracken, EVP and chief commercial officer, said on the call that lifestyle running was the category with the most disappointing sell-through for the quarter as many of the styles that were promoted during the recent holiday selling period continued, albeit at normal pricing. He said, “The consumer was resistant to a return to full-price selling in Q1 2023. That, combined with lower tax refunds and a challenging financial picture for our lower-income customers, created a significant headwind for our marquee lifestyle running franchises, which are normally full price from $120 to $200.”

Early Q1 sales in boots were also “very soft” and a “soft start” was seen for canvas and skate-inspired books as spring selling started. The resets of the Nike relationship and Champs chain also drove the declines.

Among the encouraging signs in footwear, New Balance continued as Foot Locker’s top-performing brand, growing nearly 100 percent during the quarter with strength in franchises including the 2002R, 9060 and 530.

Signature basketball was also a bright spot with the successful early launches from Nike of the Ja 1 and Lebron 20 as well as Jordan’s signature shoes from Jayson Tatum and Luka Doncic. Ongoing strength was seen for the exclusive LaMelo Ball franchise with Puma. Said Bracken, “Combined with strong Jordan Retro sales and classic court styles from Nike, we remain excited about our position at the heart of basketball culture.”

Performance running has also been strong, aided by On, Hoka, Brooks and Asics, which all continued to grow “substantially,” said Bracken. Part of the Lace Up Strategy includes enabling Foot Locker to extend to more wearing occasions, including reaching more runners.

From Adidas, Bracken said Foot Locker is seeing “very positive early reads” behind soccer-inspired looks like the Samba and Gazelle that are expected to be key storylines for back-to-school and holiday selling this year.

Apparel Down Mid-Teens
In apparel, encouraging progress was seen in private label, which grew 13 percent during the quarter, driven by particular strength from recently-launched labels, Locker and Cozy. Bracken said Foot Locker will look to tap into emerging trends in apparel, including materialization like woven bottoms as well as tech and outdoor-inspired collections.

Bracken added that despite the macro-challenges, “the consumer is still showing up for newness and key selling moments,” citing sell-outs this past weekend with the Air Jordan 4 Retro Thunder, as well as a strong lift to its women’s footwear business from a Mother’s Day campaign.

Looking ahead, Bracken cited several planned launches expected to stoke footwear demand, including scaling Nike signature basketball models at holiday during the 23/24 season tip-off and key icons like the Nike Dunk, Puma’s new collaboration with Riana set for a holiday launch, and Adidas’ launch of an Anthony Edwards signature basketball shoe as well as the brand’s momentum around Samba and Gazelle. He also expects Foot Locker to benefit from improved inventory levels and brand presentation for New Balance’s lifestyle running and court franchises, On’s expansion from 250 doors to 350 later this year, and Hoka’s expansion from 100 doors to 150.

Regional Metrics
Among regions, sales in North America declined 14.5 percent currency-neutral to $1,389 million versus a year ago and were down 12.8 percent on a same-store basis. By banner in North America, Foot Locker sales were down 7.2 percent currency-neutral to $744 million and declined 5.5 percent on a same-store basis.

Champ Sports sales were down 27.3 percent currency-neutral to $328 million and declined 24.6 percent on a same-store basis. Champ’s decline reflects the repositioning as well as Nike product being allocated to Foot Locker chains. Kids Foot Locker sales were down 7.2 percent currency-neutral to $167 million and gave back 7.7 percent on a same-store basis. WSS sales were up 8.7 percent on a currency-neutral basis to $150 million but down 3.7 percent on a same-store basis.

In EMEA, sales were up 1.0 percent currency-neutral to $393 million while easing 0.1 percent on a same-store basis. By banner, Foot Locker sales were up 3.7 percent currency-neutral to $379 million and gained 2.1 percent on a same-store basis. Sales at the Sidestep banner, which is undergoing liquidation sales with a shutdown planned for mid-year, tumbled 41.7 percent currency-neutral to $14 million and declined 37.8 percent on a same-store basis

In the Asia Pacific region, sales were up 10.6 percent currency-neutral to $145 million and gained 8.9 percent on a same-store basis. Foot Locker sales grew 12.9 percent currency-neutral to $98 million and moved ahead 11.2 percent on a same-store basis. Atmos sales were up 6.1 percent in constant currencies to $47 million ad gained 2.7 percent on a same-store basis.

Lace Up Strategy Progress
Dillon spent much of her time discussing the Lace Up Strategy that is being guided by four “imperatives”:

  • Expand Sneaker Culture: Serve more sneaker occasions, provide more choice, and drive greater distinction.
  • Power Up The Portfolio: Create more distinction among banners, including re-launching the Foot Locker brand, and transforming the Company’s real estate footprint by opening new formats, shifting off-mall, and closing underperforming stores.
  • Deepen Relationships With Customers: Reset the company’s loyalty program and elevate customer relationships through enhanced analytical capabilities.
  • Be Best-In-Class Omni: Improve the customer experience online through the full shopping journey.

On the first imperative around expanding sneaker culture, Dillon pointed to the strength seen across numerous Nike models during the quarter and she noted that Foot Locker’s team met with Nike in Portland, OR this week to plan a return to growth in 2024 with a focus on basketball, kids and sneaker culture.

Beyond Nike, Dillon pointed to the expanded shelf space for On and Hoka and said Hey Dude will be added to 450 doors across banners to support casual offerings. With growth also coming from New Balance, Puma, Asics and Adidas, non-Nike footwear product increased to 35 percent of sales in the quarter from 33 percent last year. Securing exclusives also remains a priority with healthy sell-throughs of exclusives in the quarter from Nike, Puma and Reebok. Exclusives were flat as a percent of sales at 15 percent in the quarter and the goal remains to increase the percentage to 25 percent by 2026. Private label expansion in apparel is also expected to support the exclusivity goal.

On the second imperative, Dillon noted that Champs’ transition to focus more on the active athletes’ segment is “making progress” and the company opened or converted 11 new Foot Locker Community and Power stores, ending with 184 across both concepts. She said the larger stores “allow us to offer a fuller expression of the category and sharpen our competitive edge in the marketplace.” The Community and Power formats now represent 12 percent of global square footage, up from 9 percent a year ago with a target of 20 percent by 2026.

Across all banners, off-mall now represents 35 percent of North America square footage, up from 31 percent last year with a goal of reaching over 50 percent by 2026. She said, “Both our new formats and off-mall doors are out-comping the rest of our fleet which continues to give us conviction in the strategy.”

Lastly, Foot Locker closed 35 underperforming stores during the quarter which will allow the company to focus on higher-quality locations. Overall, Foot Locker plans to open approximately 90 doors in 2023, including 25 WSS locations, while closing approximately 330.

On the third imperative of deepening relationships with customers, Foot Locker launched its current FLX loyalty program in Canada and plans to launch an updated rewards program there later this year. About a quarter of sales in the first quarter came through the current loyalty program, similar to last year, and the new program is expected to drive sales penetration to 50 percent by 2026 and 70 percent long-term.

Online, Foot Locker continues to develop and test new CRM capabilities to drive frequency and retention, including recommending the next best product for the consumer based on past purchases, as well as a notification that a product in their cart is selling fast.

To boost its omnichannel approach, Foot Locker recently added more call-to-actions, improved product recommendations, and technical improvements to its websites to drive engagement and conversion. The goal is for digital to make up 25 percent of sales by 2026, up from about 16 percent today. At the store level, handhelds that provide access to inventory and enable on-floor checkout are expected to be rolled out across banners by the end of the year.

Dillon concluded, “In summary, while early days since we launched a new strategy, we’re building momentum and gaining traction across all of our key strategic initiatives and remain excited and committed to reaching our goals and returning to long-term sustainable growth.”

Photo courtesy Foot Locker/Reuters