Foot Locker Breaks Even in Q2 on Weaker U.S

The net result was a break-even quarter on the profit line compared to net income of $18 million, or 11 cents a share, in the year-ago period.  Sales decreased 15.6% to $1.10 billion from $1.30 billion.  Excluding the effect of foreign currency fluctuations, sales decreased 11.8% for the period. Comparable store sales decreased 12.1% on top of a 0.5% dip in Q2 last year.

Mirroring the trends in the global marketplace as a whole, the retailer’s international business fared much better during the second quarter than the domestic business.  On a consolidated basis, international sales were said to be in line with last year, with Europe and Canada comps decreasing in low-single-digits and Foot Locker Asia Pacific comps increasing in the high-single-digits. The combined U.S. store operation decreased in the mid- to high-teens and Footlocker.com, which includes Eastbay, declined in low-double-digits for the month on a comp basis. When including the acquired CCS business the DotCom business increased in low-single-digits. 

Overall comp store sales declined low double-digits in May, and mid-teens in June and July.

Conducting his last conference call with analysts as he turns over the reins to new president and CEO Ken Hicks, company Chairman Matt Serra said that Foot Locker had  experienced double-digit comp store sales declines in both athletic footwear and athletic apparel.  He said the sales weakness in the U.S. was “fairly consistent across most areas of the country, in urban and suburban areas as well as inside and outside the mall.” Mr. Serra suggested that sales of higher priced marquee basketball shoes continued to be the dominant category in the men's and kids' footwear business, which helped to drive average selling prices up in the low- to mid-single-digits for the quarter, but also offered that they may need to look at more moderately priced programs going forward.                                          

 

Mr. Serra said they continue to generate “strong sales” of Jordan retro product, Nike LeBron and Kobe basketball product and new Nike hot dunk styles, but also suggested that the pull-back on some of the more moderately-priced classic product from Reebok and K-Swiss could be reversed a bit going forward.  “I think some of our competitors have taken that business from us, and we need to be a little more aggressive in that area,” said Serra. “Actually, I take it back, we need to be a lot more aggressive.”  In technical running, he highlighted Nike Air Max 90s, Asics and Puma as key products.

Serra said the business is now more dominated by the vulcanized business, which he said is “developing rapidly in the global marketplace,” and called out Nike, Adidas, Puma, and Converse as key brands in the category.  He said that premium classics from Nike also continue to be strong, with “gains in Prestige, Dunks, and Blazers leading the way.”

Women's continues to be the toughest area in U.S. footwear. Men's basketball was said to be the strongest category, followed by running. The “staggering increase” in kids in Q1 “dropped off” in Q2.
The U.S. apparel business continues to be tough even as FL continues to “gain some traction” from the introduction of new branded assortments.  The private label business was said to be “off dramatically.”

The Asia Pacific division, which operates 93 stores in Australia and New Zealand, once again produced the strongest quarter over quarter results, producing a high-single-digit comp store sales increase, and a high-single-digit profit margin.  Management said that, based on the recent sales trend, Foot Locker Asia Pacific division margin for the full year could approach double-digits.

The 130-store Foot Locker Canada business had a double-digit profit margin for the period despite the sales slippage during the quarter.
Foot Locker Europe was said to be the most profitable division during the second quarter in terms of the total division income, helped in part by very solid apparel sales gains during the period.  Increases came from private label, branded and licensed categories. 

 

Foot Locker ended the quarter with 514 Foot Locker stores in Europe, and plans to continue to proceed with the store expansion program in the region.

Serra indicated that international generated sales gains in women's footwear as well as some key men's cats, including basketball and court shoes.  Still, footwear sales in total were said to be down a little.
The Internet piece of the DotCom business apparently continues to grow and has reached 85% of the business versus 82% last year.  Division profit of this division decreased from the prior year reflecting the sales decline. The division profit margin rate of the core Footlocker.com/Eastbay business was described as “very healthy in the high-single-digit margin area. 

Second quarter sales in the CCS business reportedly continue to run behind initial expectations similar to that of other direct-to-customer businesses.  Serra said they believe the under-performance is due primarily to lower customer traffic and a contraction in consumer spending that is widespread across most of retail.  Still, he said they continue to be very encouraged with the sales results of the two test CCS stores that opened this year in Santa Monica, CA and Garden state Plaza in New Jersey.  Based on the initial success of these two stores, FL is to expand this test in 2010.  They also launched a new website for CCS during the first week of August.

The second quarter gross margin rate decreased by 220 basis points to 26.2% of sales, reflecting a 30 basis point decline in merchandise margins and a 190 basis point decline in the buying and occupancy rate. During the quarter, management said they continued to make a concerted effort to reduce the promotional cadence in the U.S. stores. 
At the same time, they remain focused on reducing merchandise inventory levels and maintaining the quality of assortments within internal aging standards.  Inventories declined 8.4% at quarter-end and are down 11.2% on a constant-currency basis from two years ago.
Looking ahead, the current third quarter sales trend in the U.S. remain negative, reflecting both the benefit from the tax-free holiday shifts into August and the negative impact of the later back-to-school season taking place in many states. Management suggested that comparisons to last year become somewhat easier as the quarter progresses. 
Last year, Foot Locker had a low-single-digit comp store sales gain in August, followed by a low single-digit sales decline in September, and a mid-single-digit sales decline in October.

Foot Locker, Inc. ended the quarter with 3,615 owned stores reflecting 26 new stores and 52 closed stores for this year. They have also remodeled and relocated 89 stores so far this year.