Riding a robust basketball business but also seeing ongoing growth in running, Foot Locker Inc. reported comps climbed 7.9 percent in the fourth quarter. Excluding non-recurring charges in both periods, earnings rose 32.1 percent in the quarter, to $111 million, or 73 cents per share, slightly ahead of Wall Streets consensus estimate of 72 cents a share.
Net earnings reached $104 million, or 68 cents per share, for the latest quarter. These results included an after-tax impairment charge of $12 million, or 5 cents per share, due to its plan to shift its CCS action sports banner to a digital-only business. Approximately $7 million of the charge came from reducing the carrying value of the CCS trade name with the remainder for write-offs related to the closing of the 22 CCS stores. Another charge estimated at 1-cent share will be taken in the first quarter to exit exiting leases and severance.
However, other than CCS and challenges at Lady Foot Locker, Foot Lockers business across banners was largely robust.
With the benefit of an extra week, total sales in the quarter increased 14.0 percent, to $1.71 billion this year. Across its banners, both Footwear and Apparel were up high single digits on a comp basis, said Lauren Peters, EVP, VP and CFO, on a conference call with analysts. Within Footwear, Basketball comps grew more than 20 percent, with notable gains big in Jordan, marquee player shoes, and classics. Its Running business in the U.S. remains solid, with a low single-digit gain for the quarter. Lightweight running performed well, particularly the Free, Flex and Dual Fusion from Nike. Technical running, fueled by Asics, Mizuno, Brooks and Nike, also posted solid gains.
With Basketball a key driver, the US businesses again led the way in top line performance. Its Direct-to-Customer segment was up 18.2 percent, with Eastbay’s comp sales up in the low teens and its store banner dot-com site up more than 40 percent.
Among the store divisions, Kids Foot Locker was once again the top performer, with a gain of almost 20 percent. Champs Sports also had another double-digit comp gain in the quarter. The Foot Locker division in the US produced a comp gain in the high single digits, while Footaction was up mid-single digits. Foot Locker Europe posted a flat comp during the quarter, with basketball styles up significantly as some customers there shifted running to basketball silhouettes.
Lady Foot Locker saw a high single digit comp loss as the chain transitions its merchandise assortments to target the athletically active, performance-oriented woman in her 20s and 30s. Gains in apparel and in lightweight technical and performance footwear were offset by declines in certain classic and lifestyle shoes and opening price point apparel.
Internationally, both Foot Locker Canada and Foot Locker Asia-Pacific produced mid-single digit comp increases for the quarter.
By month, comps increased low double digits in November, high single digits in December, and mid-single digits in January. Peters said that like others, the chain was likely slowed in January by payroll tax increase, delayed tax refund checks, shifts in the timing of product launches, and possibly less favorable weather.
Gross margins improved 90 basis points to 32.9 percent due largely to expense leverage. Merchandise margins were flat in the quarter, with a lower initial mark-up percent offset by a lower mark down rate. Apparel margins improved over last year, while Footwear margins were essentially flat. Its SG&A rate decreased in the quarter, from 21.6 percent to 21.4 percent on a comparable 13-week basis.
Inventory was up 9.2 percent largely due to the extra week in the quarter and was flat on a comparable week basis.
The quarterly comp gain brought its full-year same-store increase to 9.4 percent and its two-year stacked comp gain to just under 20 percent. Earnings in 2012 rose 38.0 percent. With the years close, the company has surpassed almost all of the long-term financial goals laid out at the beginning of 2010. The $6.2 billion in annual revenues was the highest in its history as an athletic company, its $443 per square foot achieved in the year was a record; and its EBIT margin rate at 9.9 percent was also a high. Gross margins, conversion rates and sales per payroll were also the best ever. Inventory turns also improved but were short of its long-term goal of 3 percent.
On the call, Ken Hicks, chairman and CEO, said the company has benefited from several strategies put in place over the last few years, including establishing a clear point of view for each banner and creating powerful marketing stories around key launches. Its stores and websites have been made exciting places to shop and buy through compelling product and messaging. New stores were tested across banners and a brand-new womens banner, 602, has been developed.
Around product, its push to improve apparel has paid off with double-digit comp gains in 2012, with particularly success in graphic and attitude T-shirts that hook up with footwear. Beyond Foot Locker Kids, double-digit comp gains in kid was seen across every other format and region, including a 40 percent gain in digital.
The companys banner dot.com sales grew more than 40 percent in 2012, helped by increased coordination across digital and store organizations, upgraded mobile and online sites, and enhanced customer engagement features. Eastbay.com was up low double digits for the year.
In Europe, 34 stores were added and its dot-com business was extended to a total of 8 countries. Sixty-five Foot Lockers now have House of Hoops shops, with a target of adding 100 more over the next few years. Added Hicks, The productivity of these stores increases significantly with the addition of House of Hoops, and were exploring other vendor partnerships to test similar ideas, such as the Adidas Collective shops we recently opened in Footaction and the Nike Yard line in Champs Sports.
Management also detailed how it plans to spend the $220 million capital expenditure program set for 2013, up from only $60 million over 2012 and first revealed in a SEC filing last month. Remodel projects will be tripled in 2013 to well over 200 planned. More than 15 percent of the Champs fleet will be touched by the end of 2013 and close to 10 percent of the Foot Locker fleet. The remodels will embrace new prototypes both banners have been successfully testing. Seventy-three new stores are planned, with 30 to 35 targeted for Western Europe. The Kids Foot Locker banner is opening just under 20 new stores. Eighty-eight stores are expected to close.
The 602 womens concept and newly-designed Lady Foot Locker stores are performing better than the rest of the chain. Four new test 602 stores will open during the second half of 2013. Overall, FL will be spending less capital this year on its Women’s business.
The remainder of its cap spend will go toward information technology, including a new merchandise allocation system, an upgrade to its warehouse management systems in Europe and the US, and ongoing investments in its digital businesses, both mobile and online.
Looking ahead, Foot Locker expects another double-digit percentage annual profit increase for 2013, driven by a mid-single digit comp sales gain. Flat to slightly positive gross margin are expected. An expected lower markdown rate due to the application of its business intelligence tool as well as merchandise flow initiatives are expected to offset some ongoing pressures on initial markups.
Hicks noted that despite an absolutely terrific February in 2012, Foot Locker managed a low-single digit comp gain this February. In early March, sales were up high-single digits but so far sales in the first quarter are running slightly below plan.
Were monitoring some of the economic factors that we believe impacted business at the end of January and the beginning of February, said Hicks. Well make adjustments as necessary, but our inventory is fresh and the product pipeline in Basketball, Running, Classics, and Apparel is strong, with exciting young players like Kevin Durant coming to the floor and innovative products like the Nike Flyknit and Adidas Boost ready to hit the market in a much bigger way.
