Foot Locker Inc. reported net income dropped 35 percent in the third quarter. Earnings would have been down 23 percent excluding a restructuring charge that largely covered layoffs and topped Wall Street’s targets.
Third Quarter Results
Net income for the company’s third quarter ended October 28, 2017 was $102 million, or 81 cents per share, compared with net income of $157 million, or $1.17 per share in the same period of 2016.
Third quarter comparable-store sales decreased 3.7 percent. Total sales decreased 0.8 percent, to $1,870 million this quarter, compared with sales of $1,886 million for the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, total sales for the third quarter decreased 2.3 percent. The company’s gross margin rate decreased to 31 percent of sales from 33.9 percent a year ago, and the selling, general, and administrative expense rate increased 30 basis points to 19.7 percent of sales. Within SG&A, the company incurred $7 million of hurricane-related costs, the majority of which related to damaged or lost inventory.
The third quarter results included a $13 million pre-tax charge related to reducing and reorganizing corporate and division staff. Excluding this charge, which reduced after-tax earnings by 6 cents per share, non-GAAP earnings were 87 cents per share, compared to non-GAAP earnings of $1.13 per share in the comparable period of 2016, a slump of 23 percent.
Results exceeded Wall Street’s guidance calling for adjusted earnings of 80 cents per share on sales of $1.84 billion.
“The company’s results in the quarter were broadly in line with our expectations,” said Richard Johnson, chairman and chief executive officer. “Despite the highly promotional environment we still see in the marketplace, the availability of premium product is gradually improving compared to the first half of the year, and we believe we can achieve, and perhaps modestly exceed, the top- and bottom-line guidance we gave for the fourth quarter back in August.”
When it reported second-quarter results on August 18, Foot Locker lowered its expectations for the year given the challenges in the marketplace. At the time, the company said it expected comparable sales to decline in the 3 percent to 4 percent range in both the third and fourth quarters, gross margin to decrease 230 to 250 basis points in Q3 and 150 to 170 basis points in Q4 on a 13-week basis, and non-GAAP EPS to decrease between 20 percent to 30 percent in the second half of 2017.
Johnson continued, “The reduction and reorganization of our corporate and division staff during the quarter, while a difficult decision, was a critical step in positioning us for success as we navigate through the tremendous disruption affecting our customers and the retail industry in general. We are adjusting our course proactively, including creating new initiatives with key vendors and making critical investments in our digital platforms and supply chain, to ensure that Foot Locker will continue to thrive at the center of sneaker culture and, more broadly, youth culture.”
Lauren Peters, executive vice president and chief financial officer, added, “In addition to taking meaningful steps to create an even more flexible and efficient organization, we maintained our solid management of inventory in the third quarter, which is enabling us to flow improving merchandise assortments into the business for the holiday season. We also significantly accelerated the pace of share repurchases in the quarter given the value we perceived in the price of the company’s shares.”
Net income for the company’s first nine months of the year decreased to $333 million, or $2.55 per share on a GAAP basis, compared to net income of $475 million, or $3.50 per share, for the corresponding period in 2016. Year-to-date sales were $5,572 million, a decrease of 1.4 percent compared to sales of $5,653 million in the corresponding nine-month period of 2016. Year-to-date, comparable store sales decreased 2.9 percent, while total year-to-date sales, excluding the effect of foreign currency fluctuations, decreased by 1.5 percent.
Year-To-Date Non-GAAP Adjustments
On a non-GAAP basis, earnings per share for the nine-month period totaled $2.84, an 18 percent decrease compared to the same period in 2016. In addition to the $13 million reorganization charge in the third quarter of this year, the company’s results in the second quarter included a $50 million pre-tax litigation charge. Combined, these two charges reduced GAAP earnings by 29 cents per share, compared with non-GAAP items which increased GAAP earnings 4 cents per share in the first nine months of 2016.
At October 28, 2017, the company’s merchandise inventories were $1,315 million, 3.4 percent lower than at the end of the third quarter last year. Using constant currencies, inventory decreased 4.9 percent. The company’s cash totaled $890 million, while the debt on its balance sheet was $126 million. The company spent $304 million to repurchase 8.69 million shares during the quarter and paid a quarterly dividend of 31 cents per share for $38 million.
Store Base Update
During the third quarter, the company opened 12 new stores, remodeled or relocated 41 stores, and closed 22 stores. As of October 28, 2017, the company operated 3,349 stores in 23 countries in North America, Europe, Australia, and New Zealand. In addition, 83 franchised Foot Locker stores were operating in the Middle East, as well as 14 franchised Runners Point stores in Germany.
Photo courtesy Foot Locker