While Foot Locker second quarter comps came in “slightly below” management expectations, and continue to lag the gains seen at many other mall teen fashion retailers, the arrival of more Nike marquee product throughout the quarter and into Q3 is giving the retailer great hope that they have turned the corner on their weak performance that has plagued them since they first got into the spat with the brand.

Foot Locker also owes Nike for pushing them into a less promotional strategy for their stores, a strategy that is building margin and the bottom line. Management said that average selling prices are running higher than at the same time last year.

The recently acquired Footaction stores had an positive impact on the top line, but were also a clear drag on margins and the bottom line as Foot moved to liquidate inventory acquired in the deal. FL said that only $3 million of the original Footaction inventory remains after aggressive moves to clear it. A great deal of aged Champs and Foot Locker inventory was also reportedly pushed out through the Footaction doors as well.

Excluding the $104 million in sales contributed by the remaining 349 Footaction stores, Foot Locker sales were up only 3.6% to $1.16 billion for Q2, but gross margins would have increased 100 basis points to 30.5% of sales. Footaction GM was just 12.5% of sales as the company cleared broken sizes and aged goods.

Net income was impacted by the integration of FA, which cost FL $10 million, or 7 cents per diluted share, but was also helped by tax benefits and exams that boosted income by $37 million, or 24 cents per diluted share. Excluding the effect of FA and the tax benefits, net income from continuing operations increased 48.6% to $55 million, or 36 cents per diluted share.

By month, May comped down in very-low-singles, June comps were down low-single-digits, but July comped up in low-single-digits.

The U.S. Foot Locker business, which includes the Foot Locker, Lady Foot Locker, and Kid’s Foot Locker stores, saw a low-single-digit increase for the period, with the Foot Locker nameplates showing the biggest increase. Champs comps increased at the same rate. The International business was again the drag for the quarter, declining mid-single-digits for the quarter. The Dot Com business comped up in low-single-digits. Europe comps were down mid-singles, with France and the U.K. were responsible for most of the softness. Italy was said to show “good comp store sales gains.” The Asia/Pacific region and Canada both produced “very solid profit increases” I the quarter.

Company chairman and CEO Matt Serra said they were “pleased” with the 20 Pack product form Nike, but also played up their recent receipts of Nike Shox NZ’s in “certain” Foot Locker and Lady Foot stores as the forefront of a trend to re-build that business going forward.

Serra pointed to the Impax and crosstraining product that had been “very strong’ across all divisions and said Jordan and Huaraches had also sold well in July. He said that deliveries of Nike marquee product “will at least double in all divisions” in the back half.

While Foot Locker said that they believe Classics sales have peaked, they also said they continue to sell “very large quantities” of the category. Serra pointed to NB 574’s, Chuck’s, AF1’s, Superstars, and “various” Reebok classic styles as key performers. Other product that was called put by Serra included the “music-related shoes” from Reebok and adidas’ Garnett shoe.

Serra did say that sales of Licensed Apparel continued to slow during the quarter, but said the business was “far from dead”, just a “little more challenging.”

Footaction stores are expected to average $1 million in sales for 2004 and is seen contributing four cents per share for the back half of the year. Serra still sees the FA business averaging about $1.4 million per store in 2005 and contributing ten cents per share to the bottom line. FL has re-negotiated all Footaction leases so the average lease life is on par with their other stores.

The company has yet to outline its plan for how to differentiate the Footaction stores in the mall. Serra said that there is only ten locations where there is not overlap with current stores, but still does not see cannibalization of the business.

Looking ahead, Serra said that sales in the U.S. were off to a “good start” in August and “improved somewhat” in Europe. The company planned a mid-single-digit decline in Europe for the third quarter.

Earnings per share from continuing operations are expected to continue to show increases of 10 to 20 percent for each remaining quarter of 2004.


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