Foot Locker, Inc. looked to strong growth in the Champs and Footaction businesses in the U.S. and hints of a turnaround in the Europe business as positive long-term indicators for the company. But a decline in gross margins attributed to a promotional strategy in Europe, along with a number of charges and expenses associated with the impact of hurricanes and the pending insolvency of an insurance administrator and other litigation expenses, cut into profits for the fiscal third quarter.

Income from continuing operations was $65 million, or 41 cents per share, for the third quarter, compared to $74 million, or 47 cents per share, in Q3 last year. Excluding the effect of FX rate fluctuations, total company sales increased 2.6% for the period, with August comps rising in low-singles and Sept. and Oct. comps both increasing in low- to mid-single-digits.

Comparable store sales for the U.S. business were up in mid-single-digits for the quarter, with the U.S. Foot Locker group, which includes the Foot Locker, Lady Foot Locker, and Kid’s Foot Locker nameplates, comping up in low-singles for the period. Footaction has entered the comp store picture with a bang, posting a double-digit comp sales gain for the quarter on stronger sales in both footwear and apparel. The Champs business was close behind, comping up “nearly double-digits” for the third period, with apparel up in double-digits, thanks in part to a better NFL licensed business. The DotCom business, which includes Eastbay, was up in low- to mid-singles, with 60% of the business coming from the Web and the rest from catalogs.

Foot Locker said that IMU, overall markdown rates, and the resulting merchandising rate for the quarter were “very much in line” with the year-ago period. FL also got a GM lift from a 50 basis point improvement in the tenancy rate.

From a merchandise perspective, Foot Locker sees continued growth in the marquee footwear business, but “it’s not really performance-based,” according to a company spokesman. He did acknowledge a shift away from classics, but also indicated that “not every classic shoe is declining.” He said some of the shift is from classics from one brand to another, with fashion driving the move. He also indicated that some of the shift in classics is moving to the low-profile product as well.

While Europe did not comp positive for the period, there was a clear improvement from recent trends as same-store sales declined in very-low-singles for the third quarter. More encouraging is the fact that October comped up in low-singles for the region. An increase in targeted promotional activity was cited as a key driver for the improving trend.

In a release earlier this month, company Chairman and CEO Matt Serra indicated the initiative also led to “a lower division profit margin in Europe, albeit at a rate still anticipated to be in the low-double-digit range.” He said last week the division continues to track toward a low-double-digit profit rate for the year. Serra said the problems in Europe were about 50/50 internally and externally generated.

The company’s total international business posted flat comps for the year, with Canada again shining as the “strongest of the International businesses.” Canada produced a double-digit profit margin for the period. The Asia Pacific region produced a low-double-digit total sales increase for the period, attributed primarily to an increase in door count.

The company is forecasting fourth quarter EPS to be in the range of 53 cents to 61 cents per share on a low- to mid-single-digit comp sales increase, with full year EPS pegged in the $1.59 to $1.69 per share range.

Foot Locker, Inc. 
Third Quarter Results
(in $ millions) 2005 2004 Change
Total Sales $1,408 $1,366 3.10%
Gross Profit % 30.5% 31.2% -60 bps
SG&A% 19.9% 19.8% +10 bps
Net Income $66.0  $74.0  -10.8%
Diluted EPS 42¢ 47¢ -10.6%
Comp Sales +2.7% +1.2%  
Inven* $1,400  $1,291  +8.4%
*At quarter-end