Coming off four consecutive years of record-breaking financial results, Foot Locker Inc. again hiked its bar with the release of its goals for the five-year – 2016 to 2020 period.
The new financial targets for 2020 include:
Sales of $10 billion; up from $7.2 billion in 2014;
Sales per gross square foot of $600, up from $490 in 2014;
EBIT margin of 12.5 percent, up from 11.4 percent in 2014;
Net income margin of 8.5 percent versus 7.3 percent in 2014;
Return on invested capital of 17 percent, up from 15 percent in 2014;
Inventory turnover of 3+ times, versus 3.7 times at the close of 2014.
At the company’s analyst meeting in New York City, Foot Locker President and CEO Richard Johnson noted that Foot Locker initially set its latest five-year plan in 2010 and those were adjusted by 2012 due to strong execution. By the close of 2014, it had already reached three of its long-range objectives under the 2015 plan EBIT margin, net income margin and return on invested capital – and moved closer on all the others.
He detailed many of the key factors guiding its recent momentum, including better segmenting its various banners to help differentiate them, creating more compelling shopping environments through ongoing remodelings and vendor-partnered shops such as House of Hoops, creating marketing excitement tied to NBA All Star Weekend and other events; and expanding in categories beyond basketball. The performance over the past four years also benefited from greater communication between stores and its e-commerce websites, and social media outreach. Kids has been particularly strong, Eastbay more than doubled its business over the last few years, and its banner e-commerce websites have been even stronger.
But the meeting was much more about building on that momentum and seizing new growth opportunities over the next six years.
“We have made good progress,” said Johnson. “It has been a good run, but together as a team, we really believe that we are just getting started.”
Foot Locker's updated strategic priorities are to:
Drive performance in the core business with compelling customer engagement
Expand its leading position in the kids' business
Aggressively pursue European expansion opportunities
Build its apparel penetration and profitability
Build a more powerful digital business with customer-focused channel connectivity
Deliver exceptional growth in its women's business
Build on its industry-leading team by embracing the power of its sales force
REMODELINGS/VENDOR CONCEPTS TO SUPPORT CORE ADULT U.S. BANNERS
At its adult male banners here in the U.S., one focus will continue to be on creating fresh and engaging store environments partly through ongoing remodeling efforts, said Jake Jacobs, president and CEO, Foot Locker North America. At the close of 2014, about 20 percent of its Foot Locker U.S. fleet had been remodeled and 25 percent of Champs. About a third of both chains are expected to be remodeled by the close of 2015 and that will climb to 45 percent by the close of 2017.
Footaction has a “very encouraging” new prototype in Garden State Plaza and 45 percent of the chain will feature the new format by 2017. More House of Hoops stores and instore shops are planned over the next two to three years as well as other vendor-formats. These include A Standard with Adidas and Puma Labs at the Foot Locker chain, Flight 23 and Kicks Lounge at Footaction, and the Yardline American football concept at Champs.
On the marketing front, investment dollars will continue to shift from traditional media to focus on digital and social for the U.S. banners and particularly tap into “big moments like NBA All Star, Super Bowl, New York City Marathon, as well as our own events, like Foot Locker Cross Country and Footaction's Own the Summer series,” said Jacobs. Foot Locker currently has over 150 million followers across its four major platform partners: Facebook, Instagram, Twitter, and YouTube. Mobile will also be a focus with a new app around Foot Locker and the rest of the banners launching over the course of 2015 and on into 2016.
KIDS FOOT LOCKER IN EXPANSION MODE
On kids, Jacobs said the company has opened 75 Kids Foot over the past three years, “and we will continue to invest in our door growth domestically.” It also has 21 Kids Foot Locker stores in five markets internationally, and plans to have 50 stores outside of the U.S. by 2017. By the end of 2020, Foot Locker projects it will have 100 or more Kids Foot Locker stores internationally. Kids Foot Locker also has 15 Fly Zone in-store shops in partnership with Nike and those will be expanded over the next three to five years.
At the store level overall, a focus at Kids Foot Locker will be on “creating fun and exciting environments in our store” while “developing content to engage and connect, not only with the kids, but also the parents.”
RUNNERS POINT AND SIDESTEP TO DRIVE EUROPE GROWTH
In Europe, the company still sees an opportunity to expand the Foot Locker banner inside the 19 countries where it already has a “strong footprint” as well as opportunities for Kids Foot Locker. The company particularly sees expansion opportunities for both Runners Point, a running specialty concept, and Sidestep, more of a sneaker shop, “outside of the German borders into various markets across Europe,” said Johnson.
Both Runners Point and Sidestep were acquired in 2013 with the acquisition of Runners Point Group. Particularly underpenetrated markets for both are in France, the U.K. and Spain.
For the first time, the company will be operate a “multi-banner offense” in Europe with Foot Locker alongside Runners Point and Sidestep. Johnson estimates it will take 18 to 36 months to fully leverage that approach.
APPAREL SEEKS PREMIUM POSITIONING
Apparel continues to be a struggle. Partly because footwear “has been on such a tremendous run,” apparel penetration has decreased from 28 percent of sales in 2004 to 21 percent at the close of 2014. Johnson still sees an opportunity to turn around apparel with a focus on premium positioning. Said Johnson, “We will improve our turns, we will improve our margin, we will improve our opportunities to grow the business.”
One ongoing effort is better positioning apparel assortments to each banners’ unique customer. The Foot Locker chain customer is looking for an apparel hook-up to his sneakers while assortments are more of a focus at Champs, as well as in Foot Locker Europe and Foot Locker Canada. Said Johnson, “We tell bigger, broader assortment stories – more colors of the item, more items to choose from.”
Pointing to the success of fast-fashion chains, Foot Locker will work with vendors “as we try to get closer to market [and] we try to get into a mold where we can test and roll out much quicker.”
Given the challenges in the licensing business, particularly with professional players more frequently changing teams, the fan business will be downplayed at Champs. Investments in talent and developing and testing new merchandising ideas will also be a focus in apparel.
DIGITAL TO EMPHASIZE CONNECTIVITY
Foot Locker’s digital business, which has seen stupendous growth over the last few years, will focus on engagement from a more personalized digital experience point of view, continuing investments in technology, and leveraging the entire company's capability in meeting customer’s needs, according to Dowe Tillema, president and CEO of Footlocker.com/Eastbay.
These include buy online, ship from store and buy online, reserve in-store. It’s testing selling Eastbay merchandise in four different Champs locations
Eastbay is also expanding its outreach to female athletes, which now represent about 30 percent to 35 percent of the page count in the Eastbay catalog. In addition, team sales continue to receive a greater investment. Said Tillema, “The main thing we are going to use, the main driver we are going to use there is expansion of our field reps, field representatives. Right now, we are currently physically in 18 states, including some of the bigger markets like Florida and California.”
WOMEN’S TO EXPAND 602
In women’s, another struggle in recent years, the focus will be on expanding 602, a more apparel-focused concept it’s been testing for two years. Lauren Peters, EVP and CFO, said the overall active women’s opportunity is about wearing athletic-inspired looks for occasions beyond her workout, with bottoms being the core driver of the trend. She said 602 stands out because Lululemon, Athleta and others attacking the trend are vertical.
“We are the only multi-branded specialty concept that brings her both footwear and apparel in an environment just for her with a dedicated staff that can help ensure her fit, function and style needs are met,” said Peters.
The 602 concept ended last year with 15 doors and expects to add another 20 this year. In 2015, 602 will focus on “establishing the brand in our market clusters while sowing the seeds for a broader national brand awareness through our dot.com and digital marketing efforts. This should be the year where we conclude testing and set the stage for transition to expansion mode.”
Johnson described women’s as “a little bit of a longer-term sort of payback, but we are committed to making the women's business successful.”