Foot Locker Gets Mall Momentum Back, But Europe Impacts First Quarter…

What a difference a year (and Nike) makes in the mall. It seems like just yesterday that Finish Line was the high-flying format in the mall and Foot Locker, Inc. was playing catch-up, languishing in a heavy promotional cycle and lacking a significant position in key marquee product from Nike. Much has changed in the competitive landscape as Foot Locker gets Footaction healthy again, Champs continues to deliver big gains, and Lady Foot Locker starts to see some results from a turnaround plan launched 18 months ago.

Foot Locker is still challenged by a tough European market, but the gains in the U.S. and Canada markets are offsetting the weakness there. Overall February comp store sales increased in low- to mid-single-digits, while April’s mid-single-digit gain offset a decline of similar scale for the March period, thanks in large part to the Easter shift. The overall 0.5% comp store sales gain for the quarter was said to be below plan, but the bottom line still benefited from improving gross margins and solid expense controls.

The retailer saw a 70 basis point improvement in merchandise margins. The adoption of new accounting standards and unfavorable FX rates impacted the bottom line to the negative.

Sales in Europe were down in the high-singles and were generated at higher margins and lower markdowns. Foot Locker Canada posted a double-digit profit margin for the period. Asia Pacific sales were “essentially flat” and profits were said to be “down slightly” on the liquidation of slower-moving apparel product.

The U.S. Foot Locker business, which includes the Foot Locker, Kids Foot Locker, and Lady Foot Locker nameplates, posted a low-single-digit comp store sales increase in the fiscal first quarter through April 29. The LFL gain was attributed to increased sales of Nike Shox and Air products and well as improved assortments of low-profile fashion athletic product. Improving average selling prices helped push operating profits up in double-digits for the format. The Foot Locker doors saw strength in men’s running, women’s casual, and kid’s footwear. Operating profit for the combined FL/KFL business was up in strong double-digits.

At Footaction, the sales increase was said to be broad-based across footwear, apparel, and accessories, with “strong gains” seen in marquee basketball and running. Apparel gains were driven by improvements in both branded and private label. Champs posted a mid-single-digit increase, driven by men’s running, children’s footwear, and a “strong increase” in private label apparel sales. Company Chairman and CEO Matt Serra said the Champs chain will likely exceed a billion dollars in sales for 2006, with profit margins approaching the double-digits. The DotCom business, which includes footlocker.com and Eastbay, posted a mid-single-digit sales increase for the first quarter. The business continues to shift here as more consumers opt to buy online. Internet sales made up 71% of order intake for the division versus 63% of sales last year.

On a combined basis, the U.S. business produced a profit increase of approximately 20% for the first quarter, with each unit producing double-digit profit gains and higher margins.

For the second quarter, Foot Locker, Inc. sees EPS in the range of 27 cents to 30 cents per share on a mid-single-digit comp sales gain in the U.S. and a mid-single-decline in Europe.