Like its competitors, Foot Locker Inc. saw a slowdown in second quarter revenues and reported earnings that slightly missed Wall Street’s targets. But unlike the others, Foot Locker maintained its full-year outlook, expecting to achieve mid-single digit same-store sales growth and a double-digit profit increase.
Shares of both Dick’s Sporting Goods and Hibbett Sports fell sharply last week after each reduced their EPS targets due to the challenging economic climate. FL saw a slight gain in trading after reporting results on Friday morning.
On a conference call with analysts, Ken Hicks, chairman, CEO and president, noted that while results missed internal expectations as well, the company posted comp sales gains in every month and in most countries and saw a gain in EPS of more than 20 percent, building on last year's record performance. The company also made a strategic acquisition of the Germany-based Runners Point and it “contributed to the bottom line right off the bat, and we continue to execute a major remodel program.”
Adjusted for one-time items, Foot Locker earned 46 cents a share in the second quarter, representing a 23 percent gain versus the year-ago period and described as the company’s best ongoing profit and sales results in history.
Wall Street’s consensus estimate had been 45 cents a share. Adjusted earnings exclude approximately $5 million, pre-tax, in costs related to the $94 million acquisition of Runners Point Group and the closing of the CCS retail stores.
Total second quarter sales increased 6.4 percent, to $1.45 billion. Excluding the effect of foreign currency fluctuations, sales increased 5.9 percent.
Comparable-store sales increased 1.8 percent, missing its plan for a mid-single digit gain. Low-single digit gains were seen in each month, according to Lauren Peters, CFO and EVP. Combining its 5.2 percent comp gain in the first quarter, year-to-date comps were ahead 3.5 percent.
Foot Locker officials also noted that the trend had improved somewhat so far in the current quarter, with month-to-date comps in August ahead low mid-single-digits.
FL’s direct-to-customer business continued its momentum, growing 20 percent, including a high single-digit gain in Eastbay and another 40-plus percent gain in its store banner.com businesses.
Its North American stores as a group suffered a low single-digit comp decline. Foot Locker in the U.S. and Canada, Champs Sports and Lady Foot Locker all posted comp losses in the low single-digit range, with Footaction off mid single-digits. Kids Foot Locker continued its recent strength with a high single-digit comp gain.
Outside North America, both Foot Locker Europe and Foot Locker Asia Pacific produced mid single-digit comp gains. Europe saw double-digit comparable sales gains in several countries, with its five biggest countries each comping positive.
Regarding categories, footwear sales grew low single-digit while apparel and accessory sales were both up slightly. With a double-digit comp gain, Children's led footwear with strength across formats. Children's basketball styles posted a strong sales gain, partially offset by a decline in running.
Men's footwear was up low single-digits, with basketball and running both posting comp gains. But declines were seen in certain classic styles, seasonal products such as slides, and in retro training styles.
Women's footwear was down slightly during the quarter. In its U.S. stores, gains in technical and performance running footwear did not offset declines in casual footwear. FL is repositioning its women's assortment to be much more performance-based. Internationally and online, women's footwear “continues to grow nicely,” said Peters.
In apparel, children's jumped more than 30 percent, off a relatively small base. Men's and women's apparel were flat to down slightly. Within accessories, both socks and hats continued to generate gains, although other items, in particular shoe care products, posted declines.
Gross margins were off 10 basis points to 31.2 percent. Ten basis points of leverage on occupancy and volume cost was offset by a decline of 20 basis points in merchandise margin. Peters said FL’s overall markdown rate “continues to edge lower, even with the softness of our top line sales in Q2 relative to our expectations.”
She added that Foot Locker is “clearly still running a primarily full-priced business with relatively little promoting,” but a number of factors are putting pressure on its gross margin rate. These include lower margins in general in Europe than historically, and a lower initial mark-up rate due to changes in its vendor mix, including less private label and cost increases from vendors. She said the Foot Locker hasn’t been able to pass along all the cost increases with some in-line styles.
The mid-single-digit increase in average selling prices reflected the higher prices from vendors and lower markdowns. Added Peters, “Although ASPs were up, units were down, impacted by lower mall traffic.”
Inventory was ahead 6 percent, in line with the total sales gain. But excluding Runners Point’s inventory and sales and adjusting for changes in FX rate, inventory was up less than 2 percent.
Elaborating on the footwear business in the U.S. that drove the comp shortfall, Hicks noted that basketball and running were both up mid-single digits in the quarter with the gains in basketball less robust than recent quarters. Said Hicks, “Retro Jordan releases are still tremendously popular with our customers, but we're going up against very strong numbers, so growth in the quarter was minimal. We also continue to be a popular destination for Lebron, KD and Kobe products.”
He called running “definitely another bright spot for us, and performance product continues to generate solid gains,” citing Nike, Asics, Brooks, Mizuno and Adidas. Lightweight's also “doing well,” particularly the Nike Free and Roshe Run, as well as the recently introduced Adi Boost.
On the downside, retro training was off double digits. And while vulcanized product in Vans and Nike increased, a slowdown was seen in Converse and seasonal products such as sandals and slides. Said Hicks, “We are encouraged that the fresher products across all of our categories are working well, and we are positioning ourselves for the back half of the year to emphasize these programs and styles. Overall, while we had several challenging footwear categories, we still managed to generate a solid comp gain.”
Apparel sales and margin during the quarter were nearly flat for the company as a whole. Hicks said apparel is being impacted by a style shift away from some of the core athletic looks that Foot Locker had been finding success with recently. Said Hicks, “We did better with fashion shorts and tees than the more athletic styles. Later in the quarter, we were also up against some very strong sales of Olympic product from a year ago, not only in Europe, but also in the U.S.”
Hicks believes Foot Locker is positioned to make “reasonably quick adjustments” to its apparel assortments. Overall, he called the apparel performance “decent result under the circumstances” and said management still sees an opportunity to increase its apparel penetration closer to 30 percent, with margins above footwear. Added Hicks on apparel, “We may not have scored a touchdown this quarter, but we didn't exactly fumbled the ball either.”
Richard Johnson, COO and EVP, noted that remodeling efforts produced a “slight drag on comps in Q2.” It remains on track to remodel 10 percent of Foot Locker and 15 percent of Champs Sports banners. Most Kids Foot Locker have already been updated. The Foot Locker stores with the new House of Hoops shop “are doing particularly well,” he added.
FL is in the process of converting some of its CCS stores into its new SIX:02 women’s fitness-themed concept. With 4 stores planned, it expects to have 7 in place by the holiday in a continuing test. Johnson said the current three in the market are “significantly outperforming” the rest of the Lady Foot Locker chain, which overall showed some improvement in Q2, with a low single-digit comp loss compared to a high single-digit comp loss in Q1. A SIX:02 website will be launched in September.
Foot Locker is “well along with the design of a new Footaction prototype store,” and testing Adidas shops inside Footactions in Houston, Johnson added.
Hicks spoke most enthusiastically about the direct-to-customer business, describing it as “a very strong growth engine for our company.” He noted that the company is partnering with vendors to extend the product SKUs beyond what can be shown in stores, such as large sizes and more colors, as well as additional sports categories. Mobile is also “experiencing rapid-fire growth,” and the company continues in invest in the online experience and linking the store to online operations for customers. He added, “We're optimistic that our direct-to-customer business will continue to lead our growth in the coming quarters and indeed, the years ahead.”