Marking the most profitable quarter in its 100-plus years as a public company, Foot Locker Inc. reported first-quarter earnings jumped 13.6 percent to $184 million, or $1.29 a share, easily topping Wall Street's consensus estimate of $1.23 a share.
Sales increased 2.6 percent to $1.92 billion and grew 7.9 percent on a currency-neutral basis. Comparable-store sales jumped 7.8 percent.
On a conference call with analysts, Lauren Peters, EVP and CFO, said store sales globally were ahead 6.5 percent while direct-to-consumer (DTC) climbed 18.5 percent. In the DTC segment, Eastbay was up lower-single digits. Domestic-store banner websites were up almost 50 percent, representing two-year compound growth of over 90 percent. Overall, DTC increased to 12.3 percent of company sales from 11.3 percent a year ago.
After DTC, the strongest growth came from its international division. Europe was up low-double digits with double-digit gains in all major countries. Foot Locker Asia Pacific was ahead in the low-teens. Canada grew in the high-single digits.
The U.S. also saw a “strong performance,” said Peters. The Foot Locker banner and Footaction were both up high-single digits while Kids Foot Locker and Lady Food Locker were up mid-single digits. Lady Foot Locker marked its fourth consecutive quarter of positive sales growth.
Champs saw a low-single-digit decline as strength in footwear couldn’t offset an ongoing decline in apparel sales. Peters said Champs remained a “highly profitable chain with significant opportunity to get back to positive sales growth.”
Among categories, footwear was up low-double digits. Apparel was “close to flat” while accessories, challenged by trends in hats and socks, were down high-single digits.
By category, running sales increased in the mid-teens, with Foot Locker Europe posting the strongest gain. Basketball was up low double digits overall, with growth even higher outside the U.S. The casual category was mixed, with gains in boots and certain classics offset by declines in various vulcanized styles.
By month, February was up mid-single digits. March grew low-double digits with the benefit of the Easter shift. April grew mid-single digits.
Peters said the performance is particularly benefiting from investments in training its associates and maximizing associate engagement during peak selling opportunities. This resulted to across-the-board gains in sales per payroll hour, which particularly helped bring SG&A expenses to record low level in the first quarter.
Inventory turnover also continues to improve. On an actual basis, inventories were down 2.7 percent versus the 2.6 percent overall sales gain. On a currency-neutral basis, inventories were up 2.4 percent against a 7.9 percent increase.
Among other metrics, FL saw an increase in average unit retail driven by the lower markdown rate as well as the ongoing trend of customers opting for more premium product. Traffic as well as units sold were down slightly but conversion picked up.
On the call, Dick Johnson, president and CEO, said both the Foot Locker banner and Footaction in the U.S. have benefitted from efforts to differentiate their banners.
“Both have taken full advantage of the strong trends in lifestyle running footwear, including platforms such as the Roshe, Huarache, and Max Air from Nike, and ZX Flux from Adidas,” said Johnson. “At the same time, they have also sharpened their focus on their customer, with Foot Locker really taking advantage of the ongoing strength in signature basketball.”
He called it “very encouraging” to see customers embracing new signature athletes such as Kyrie Irving with Nike, Steph Curry with Under Armour, and Damian Lillard at Adidas while established players lines, including Lebron, KD and Kobe, continue to grow.
Footaction, according to Johnson, is benefiting from many of the same trends as the U.S. Foot Locker banner but also has “an especially strong position” in other lifestyle footwear silhouettes from Jordan, Nike, Timberland and Puma. In apparel, Footaction is seeing “nice” comp gains by focusing on the lifestyle assortments of the established athletic brands while also working with smaller nontraditional vendors “to bring a fresh and different fashion look to our customers.”
A remodeled Footaction store design is being rolled out to “excellent results so far” with additional Jordan Flight 23 and Nike Kicks Lounge shop-in-shops inside its Footaction stores also being rolled out.
Johnson said that Champs Sports likewise participated in many of the strong footwear trends at its other men’s U.S. banners and also benefitted from a strong response to the Adidas Superstar that saw strength globally. But Champs has larger exposure to training and performance running styles, “which has limited its footwear gains,” Johnson stated.
The bigger reason for Champs’ small comp decline in the quarter was ongoing softness in apparel. Fleece bottoms sold well, but it wasn’t enough to offset the exposure to the weak licensed apparel category and declines in shorts and performance socks. Said Johnson, “The team at Champs continues to work with our vendor partners to strengthen assortments in both footwear and apparel as we cycle against some of the programs that are down-trending.”
While Kids Foot Locker was up mid-single digits, the children's footwear at its other banners that sell the category were ahead double digits. The gain in kids came despite delivery issues related to the West Coast port delays that particularly impacted the category. Said Johnson, “Looking ahead, we believe deliveries are in good shape, and over the rest of the year we will be accelerating the roll-out of one of our successful partnerships with Nike, the Fly Zone at Kids Foot Locker. We'll also continue to add Camp L Stores to our fleet, both in the US and internationally.”
In Europe, the low-double gain was supported by basketball, driven by Jordan, up double-digits. Running was up in the high teens, with Adidas ZX Flux and Nike Modern Comfort Styles leading the gains. Its court footwear business was “also very strong,” led by classics such as the Adidas Superstar and Stan Smith.
Particularly encouraging in Europe was a modest comp gain in apparel, reversing a negative trend over the last several quarters. Said Johnson, “Gains in Nike tee and tech fleece more than offset ongoing declines in other older styles and licensed apparel.”
Johnson was also encouraged by “broad-based nature of our gains” in Europe, including countries such as Spain and Italy that had lagged the prior year with economy challenges showing double-digit comp gains.
“While it is possible that macroeconomic headwinds may still occur from time to time, our business in Europe has remained profitable throughout, and we intend to continue building out our Foot Locker and Kids Foot Locker presence in the European countries with the most opportunity for store growth,” said Johnson.
At the same time, the company continues to adjust its Runners Point and Sidestep banners to further differentiate them from the Foot Locker banner and maximize their potential, both in Germany and in other markets. A newly designed and assorted Runners Point store in Cologne opened in April to a strong response from the local running community and will be tested in other markets.
Regarding its digital segment, Johnson said the many of the same product drivers at its banners supported the robust sales gains online. Digital also delivered “healthy margins.” In its specialized assortments for the elite athlete, Eastbay continued to “perform exceptionally well,” with gains in baseball, football, soccer, training, including weightlifting shoes and overall team sales.
Johnson noted that the company’s buy-online-ship-from store capabilities “are becoming an increasingly important incremental driver of sales and margin for our business.”
Regarding its women’s business with 602 and Lady Foot Locker, Johnson said footwear was ahead mid-single digits, led by many of the lifestyle running styles from Nike and Adidas that drove the men's business. Asics also “remains a very important brand to this customer,” added Johnson.
Apparel, however, was the “real bright spot” in women’s with a low double-digit gain. Fitness pants, capris and tops both Nike and Adidas fueled most of the gains, but Under Armour and Reebok are also generating gains off smaller bases.
Johnson said the vast majority of the women’s business consists of Lady Foot Locker doors, “and we are pleased with the progress we are making there with our updated assortments, with as much emphasis as possible on key apparel elements while still driving a healthy footwear business.”
FL now has twenty 602 stores open and is supporting its potential national roll out with a 602.com website and also developing various community outreach and grassroots marketing efforts. The women's business in its other banners are “also doing very well, with double-digit footwear gains in Foot Locker in the U.S., Europe and Asia-Pacific,” added Johnson.
Looking ahead, FL retained its guidance for the year. It expects comp gains in the mid-single digits, gross margins to be flat to up slightly, SG&A leverage of 50 to 60 basis points and overall double-digit EPS growth.
Management cautioned that the second-quarter, being a relatively low sales volume quarter, will likely be the quarter most negatively impacted by the stronger dollar.
“We've been planning a mid single-digit comp gain in the second quarter, and we're off to a very solid start with a double-digit month-to-date comparable sales gain,” said Peters. “That said, there are some launch ships coming up that will likely impact that month-to-date comp rate.”
