Foot Locker to Roll Out New Family Footwear Value Format; Raises Guidance…

Foot Locker, Inc. exceeded the upper end of its earnings guidance for the third quarter even though comp store sales came in at the low end of their expectations for the period. But the big news was the revelation last week that the world’s-largest-athletic-specialty-retailer will enter the brown shoe business again with the launch of a new value-oriented family footwear chain they will call Footquarters. They will also add a new headwear-only format called Champs Sports Just Hats.

Total comparable store sales decreased 0.3%, with a high-single-digit comp store sales decline in Europe nearly offsetting comp store sales gains in the North American and Asia/Pacific retail store divisions, where comps rose in the low- to mid-single-digit range. Excluding the effect of foreign currency fluctuations, total sales for Q3 grew 0.4%.

Comps were down in very-low-singles in August, came in flat for September, and were up in very-low-single-digits in October, signaling an improving overall trend heading into the holiday season.

Management said that U.S. sales in the third quarter were in line with expectations and reflected an improved trend from the second quarter. The retailer did say that some of the U.S. gain came on an increased promotional posture that impacted retail margins. U.S. footwear comps were up in the mid-singles, but apparel saw comps decrease slightly on declines in licensed apparel that offset improvements in branded and private label. The footwear increase came from strong gains in the women’s and children’s categories, with low-profile product driving women’s and kid’s getting a lift across multiple categories. The men’s business reflected a low-single-digit gain in the basketball category from expanding allocations and strong sales of low-profile product, offset a bit by declines in classics and cross-training.

The U.S. Foot Locker business, which includes the Foot Locker, Lady Foot Locker, and Kid’s Foot Locker formats, saw comps improve in low-single-digits in the third quarter. Lady Foot Locker was called out as the strongest performing format for the quarter. Footaction also saw comps up in low-singles. Champs posted a bit better result, comping up in low- to mid-single-digits for the period. The DotCom business, which includes footlocker.com and Eastbay, saw sales decline in mid-single-digits, due in large part to the loss of the NFL.com business that is now run by GSI Commerce.

Average selling prices in the U.S. footwear business were up in low-single-digits on “healthy sales gains” in marquee basketball product, running, and low-profile styles. Improved sales were offset by higher markdown rates.

Foot Locker said it was significantly less promotional in Europe in Q3, which in turn helped contribute to a double-digit divisional profit in the region. They saw an improving sales trend in some European markets in October, but the U.K. remains a major problem. Total sales in Europe declined in the mid-singles due to an expanding store base and FX rate upside. Elsewhere in the International business, Foot Locker saw Canada and Asia Pacific comps rise in the low– to mid-single-digits and post healthy profit increases.

Average selling prices were flat in the International business.

Foot Locker, Inc.'s Chairman and CEO Matt Serra said that the comp store sales trend in Europe “improved somewhat” during the month of October from the previous two months. He also said that Foot Locker Europe's third quarter division profit margin rate is expected to be “strong at the low double-digit level.”

Based on the better-than-expected Q3 results, Foot Locker raised its guidance for EPS from continuing operations for the full year to a range of $1.58 to $1.65 per share before an eight cents non-cash charge recorded in Q2 related to the write-down of certain European assets. Fourth quarter EPS are expected to increase by “several cents” versus Q4 last year based on assumptions that include a total sales gain in the mid- to high-single-digits from new stores and an additional $60 million to $70 million for the extra week this year.

As for the Footquarters plan, the company has already identified the 30 locations they expect to open this spring in off-price and value-oriented strip centers. They plan to open another 30 to 40 stores in the fall.

Stores are planned in the 4,000 sf to 6,000 sf range. The format is planned to be about 60% athletic and 40% brown dress and casual. The athletic business is expected to be branded, while the brown shoe side is expected to be about 70% to 80% private label. Target pricing for the stores is planned for $35.00 to $49.99.

In the conference call, Mr. Serra said they had pursued an existing operation, but that a number of reasons made it more attractive to pursue its own formats.

The headwear format will see its first store open this month in Miami International Airport. Serra said it could grow to several hundred doors.

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