Driven by a healthy appetite for running lifestyle product and its positioning as the headquarters for sneakerheads, Foot Locker Inc. reported fourth-quarter earnings that handily exceeded Wall Street targets. The performance helped the company notch its 7th consecutive year of record profits.
The earnings report came on the same day that JC Penney’s announcement that it would close up to 140 of its doors led to another round of stories about how malls were becoming ghost towns. But Foot Locker will wind up becoming one of the few mall operators to report that traffic grew over the holiday season.
In the quarter, earnings climbed 19.6 percent to $189 million, or $1.42 a share. Excluding a tax benefit tied to the treatment of foreign currency translation gains and losses, earnings would have been $1.37, an 18 percent increase over non-GAAP earnings of $1.16 per share in the comparable 13-week period a year ago. Wall Street’s consensus estimate had been $1.31.
Total sales increased 5.3 percent, to $2.11 billion. Excluding the effect of foreign currency fluctuations, total sales expanded 6.1 percent. Sales were in line with Wall Street’s targets.
Same-store sales grew 5 percent on top of a 7.9 percent gain in the same period a year ago. November and December comps were up mid-single digits and January rose high-single digits, said Lauren Peters, EVP and CFO, on a conference call with analysts. Average selling prices were up and traffic in the U.S. increased low-single digits.
Store segment posted a 4 percent comparable sales gain in the quarter. Champs Sports delivered a high-single digit comparable sales increase, powered by a high-single digit gain in footwear and a double-digit gain in apparel. Foot Locker Canada marked its fifth straight double-digit quarterly comp sales increase.
The company’s SIX:02 women’s banner continued its momentum in the quarter with a strong double-digit gain, fueled by double-digit gains in both footwear and apparel, led by lifestyle offerings from Puma, Adidas and Nike. Foot Locker in the U.S. and Footaction were up mid-single digits while Foot Locker Europe comped up low-single digits despite traffic challenges across much of the continent.
Kids Foot Locker’s comp in the quarter was down at the low end of mid-single digits. However, total sales for Kids Foot Locker increased low-single digits, which reflects the addition of 21 net new Kids’ stores in the U.S. during the year. Foot Locker Asia Pacific’s comp sales were down mid-single digits, largely due to the closure of its high profile George Street store in Sydney for the entire quarter. A newly remodeled store opened in early February.
Comparable sales at Runners Point and Sidestep stores in the quarter continued to decline double-digits, as both banners continued to face a difficult retail climate in Germany, including especially significant declines in traffic.
Direct-to-customer segment comps advanced 11.3 percent in the quarter, enabling its direct-to-customer business to top $1 billion in annual sales for the first time. Digital sales in its store banners in the U.S. continued to post strong increases, up collectively over 20 percent in the quarter, while its digital businesses in Europe and Canada were each up even more. Eastbay sales declined mid-single digits. For the quarter, direct-to-customer sales increased to 15.3 percent of sales up from 14.6 percent a year ago, and for the year, reached 13.2 percent of sales compared to 12.7 percent in 2015.
Both footwear and apparel posted solid mid-single digit increases while accessories, which includes socks and hats, were down mid-single digits. Within footwear, men’s and kids were both up mid-single digits while women’s footwear ran ahead in the teens. Women’s footwear was led by casual styles such as Puma Suedes and Creepers, and Adidas Superstar.
By category, strong demand continued for lifestyle running products led to a double-digit gain in running overall, while casual styles and basketball were up low-single digits.
Gross margins improved to 33.7 percent from 33.6 percent a year ago. The gain reflected a pickup of 20 basis points from an improved merchandise margin, largely due to lowering the markdown rates in its stores, especially on apparel. The merchandise margin gain was partially offset by occupancy deleverage.
SG&A expense rate improved 60 basis points to 18.7 percent of sales due to the levering of its fixed expenses and carefully managing variable expenses such as store wages and marketing.
On the conference call, Richard Johnson, Foot Locker’s CEO, noted that the company is benefiting from a new strategic framework set at the beginning of 2015 that builds on strategic initiatives first laid out in 2010. These initiatives are: Driving performance in the core business, expanding leadership in kids, expanding in Europe, building our apparel business, elevating our digital business, and delivering growth in the women’s business.
Elaborating on each initiative, Johnson the strong performance in its core male banners in North America including Foot Locker, Champs Sports and Footaction, was driven last year by lifestyle running.
In the quarter, Nike remained the lead brand with solid sales of Huarache and Presto along with Air Max products, while Adidas led lifestyle running’s growth, with Nomad, Boost, AlphaBOUNCE, Tubular Shadow and YEEZYs, all posting strong sell-throughs. Johnson added, “The Jordan Retro assortments were very productive in the quarter, helping more than offset the declines in signature basketball. The overall basketball category posted a modest gain for the quarter and full year, led by the Jordan brand and Superstars.”
Classic sneakers also remain “very much on trend in our core business,” led primarily by Adidas and Puma, although Nike also had successes.
“The opening of our flagship store on 34th Street in August really energized many of our customers, as has the grand opening of the Foot Locker in Times Square earlier this month,” added Johnson. “It’s great to see the excitement that these pinnacle retail destinations generate for our brand.”
Beyond the reopening of its Sydney as a pinnacle location, upgraded locations will open in Chicago, Los Angeles, Toronto and Melbourne this year.
In kids, solid comps were seen within its adult banners in the quarter but the Kids Foot Locker comp decline came largely because “not all of today’s hottest styles are available on the same timelines in sufficient quantity in kids’ sizes.” Johnson said kids continue to prefer the same styles as their older siblings or parents. The company also expanded the Kids Foot Locker banner footprint outside the U.S. to 41 at year-end.
In Europe, Foot Locker’s sales didn’t increase as much as recent years but “productivity and profitability remained high with solid momentum across categories and families of business.” Twenty-two Foot Lockers opened in Europe last year and a Jumpman store opened in Paris last November in a partnership with brand Jordan. Said Johnson “We intend to continue to invest aggressively in our European business, including new stores and remodels.”
Runners Point and Sidestep recently underwent a management change and continues to work on developing the right product mix for the formats.
Apparel improved its profitability across most of its banners but overall penetration declined to just under 18 percent of its mix, down from 18.5 percent for 2015. Among brands, Adidas led apparel in the U.S. while Nike saw the best apparel growth in Europe and Puma “contributed significantly” to women’s.
The company’s banner dot-com businesses collectively increased almost 20 percent in the year and the mobile experience will again be upgraded this year. Said Johnson, “The investments we are making in our new ecommerce platform which will be rolled out by banner during the course of 2017, will provide us with tremendous capabilities to enhance and connect our customer experiences far better than we do today.”
Eastbay continues to be hurt by too much focus on performance styles. Stated Johnson, “While we’ve been focusing on providing him and her with the latest performance styles, we somewhat lost sight of the fact that for every pair of true performance shoes in their closet or locker, there’re probably a half a dozen or more casual athletic pairs in there too.”
In women’s, footwear in its predominantly male banners was “strong virtually all year” while SIX:02 results picked up especially in the second half of the year, according to Johnson. A decision to fully integrate the SIX:02 digital and store teams led to “substantial momentum” at SIX:02.com. SIX:02 will open pinnacle stores this year in Times Square and Los Angeles.
Sales for 2016 were $7.7 billion, an increase of 4.8 percent compared to sales of $7.4 billion in fiscal 2015. Full-year comparable store sales increased 4.3 percent. Excluding the effect of foreign currency fluctuations, total sales increased 5.2 percent. Sales per gross square foot reached $515.
For the full year, net income rose 22.7 percent to $664 million, or $4.91 per share. On a non-GAAP basis, EPS totaled $4.82 in 2016, a 12 percent increase over last year.
For 2017, Foot Locker is planning for a mid-single digit comparable sales gain and a double-digit earnings per share increase for the full year of 2017 although Johnson said the company is currently facing “a softer sales environment than at this time last year.”
Gross margins are expected to be flat to slightly up, driven by a modest improvement in its merchandise margin rate. Its SG&A rate is projected to be flat for the year. The EPS gains are expected to be supported by a newly expanded share repurchase program. A 53rd week, which we expect will add about $0.12 per share to our fourth quarter and full year 2017 results.
The first quarter is expected to be impacted by a slower start in the U.S. than usual due to the current delay in the release of tax refunds by the IRS compared to a year ago.
“It is our belief that our customers’ fundamental appetite for the product has not changed,” said Peters. “However, the timing of their cash flows and their ability to buy the product has been impacted.”
Image courtesy Foot Locker
