Led by robust sales across its Jordan portfolio as well as in marquee basketball footwear and lifestyle running product, Foot Locker Inc.s earnings rose 15.4 percent in the third quarter, to $102 million, or 82 cents a share.
Excluding a non-recurring charge, earnings rose 22.1 percent to 83 cents from 68 cents, exceeding consensus estimates of 79 cents a share.
Total sales increased 6.7 percent, to $1.73 billion. Excluding the effect of foreign currency fluctuations, total sales expanded 7.7 percent. Led by a particularly strong performance in the U.S., comparable sales increased 6.9 percent.
On a conference call with analysts, Ken Hicks, the companys chairman and CEO who plans to retire on Dec. 1, noted that the quarter marked Foot Lockers 19th consecutive quarter of meaningful sales and profit growth.
“We are making substantial progress towards our key operational and financial objectives, including net income margin, sales per gross square foot, and return on invested capital, said Hicks. Our banners have strong positions in the athletic marketplace; our financial footing is solid; and we have a depth of talent – at the store, field, and management levels – that is second to none.”
The comp gain was driven by footwear, up low double digits, while apparel was down mid single digits. Within footwear, men’s sales were up high single digits, women’s was up strong mid single digits, and children’s was again up double digits.
In footwear, mens running was up in the teens, with a high-single-digit gain in the U.S. and a gain well into the double digits internationally, said Dick Johnson, COO and CEO elect. The Roshe Run, Huarache, and Max Air programs from Nike are performing very well, as is the ZX Flux from Adidas.
In performance running some of the more technical brands are facing challenges, although Brooks in our women’s business is a notable exception with solid sell-throughs, said Johnson. Foot Locker is also seeing initial success with certain smaller programs in run from New Balance and Puma. Added Johnson, We are tailoring the offerings of those and all our brands to create strong running assortments that reflect the diversity of our segmented customer bases and each of our unique banners.
Basketball footwear was up double-digits. Jordan products remains very strong in all its components. Jordan Marquee was strong, Jordan Sportswear was outstanding, and Retros were up in the quarter, despite a shift of significant launch product out of October to November, said Johnson. Within signature models, the big-three players, Kobe, KD and LeBron, continue to produce healthy gains, and were seeing the beginning of what we expect could be a significant Kyrie Irving business in the future.
D Rose product from Adidas seems to be at a positive inflection point as he is working his way back onto the court, and Under Armour has gotten into the game with their successful ClutchFit shoe worn by Steph Curry. Finally, the boot season is off to a great start with the aid of significant early arrivals from Timberland and Nike.
The mid-single digit decline in apparel reflected similar trends seen in the second quarter, with apparel sliding double digits at Foot Locker Europe and down mid single digits at Champs Sports.
Both divisions were once again affected by the fashion shift away from certain lifestyle apparel programs that had in prior years helped drive strong results in the category, said Johnson. On top of that, these divisions, in fact virtually all of our male-oriented divisions, have seen a major shift out of licensed apparel which is definitely not on trend right now.
On the positive side, the combined US Foot Locker divisions, Foot Locker, Kids Foot Locker, Lady Foot Locker, and Footaction, again generated a mid-single-digit comp increase in apparel. Among the male banners, the gains were strongest at Footaction, which has benefited from showcasing an assortment of established brands mixed with smaller fashion-forward vendors that has really resonated with the Footaction customer.
Overall, the apparel performance in the U.S. Locker divisions were led by branded fleece, including trend-right pants and hoodies as wells as T-shirts, shorts, and hats that tied back to premium footwear. Said Johnson, Tech fleece from Nike was strong, and Tiro pants from Adi continue to sell well.
By channel, athletic store sales were up 5.8 percent this quarter, versus 6.1 percent in Q2, while sales in its direct-to-consumer segment jumped 15.5 percent, versus 14.9 percent last quarter.
Within the direct segment, Eastbay was up mid single digits in the quarter, a somewhat stronger performance than Q2, while its US store banner-dot-com sales continued to increase at close to a 40 percent pace. While the companys fastest-growing business, store banner-dot-com sales have yet to reach the companys goal of at least 10 percent of brick-and-mortar sales.
Aided by efforts around differentiation, all its banners posted comp gains in the quarter. Footaction led the way with a low-double-digit gain, followed closely by Foot Locker in the U.S. and Kids Foot Locker, both with high-single-digit gains. Lady Foot Locker achieved a strong mid-single-digit gain, its second in a row. At Lady Foot Locker, apparel saw a gain in the teens while footwear was up mid-single digits.
Foot Locker Europe and Foot Locker Asia-Pacific divisions both achieved mid-single-digit comp gains. In Europe, the Foot Locker banner comped positively in almost all countries. Runners Point Group was also up. Champs overall and Foot Locker Canada both had small gains. Champs Sports in particular was affected by a relatively large number of stores being closed for remodeling late in the quarter.
Overall, traffic across banners was down less than 1 percent in the quarter, partly due to a large number of remodel projects towards the end of the quarter. Average selling prices continued to rise, while units were off somewhat, primarily due to a decline in its apparel penetration.
By month, comps grew high-single digits in August and low-double-digits in September, with both months driven by a very strong back-to-school season, according to Lauren Peters, EVP and CFO. October was up low-single digits. Peters noted that October is by far the smallest month for the quarter and was impacted by a shift of a significant launch of Jordan retro and the bulk of Lebron 12 product from October into the fourth quarter. Peters added, The fact that we had a positive comp in October despite these shifts is a testament to the strength of our base business.
Moreover, November month-to-date comps are up low double-digits, benefitting from the Jordan retro launch on November 15. Although encouraging, however, Peters did note that the first two and a half weeks of November are low volume relative to the big holiday selling season coming up, said Peters. As such, despite the November strength, Foot Locker still expects a mid-single-digit comp gain for Q4.
Gross margins improved 10 basis points to 33.2 percent. A negative 20-basis point impact related to the liquidation of CCS merchandise was offset by leverage on fixed costs. Peters said the trends of lower initial markup rates and lower shipping income continued in the third quarter. She added, We did also manage to significantly lower our markdown rates while maintaining the freshness of our inventory.
SG&A expenses were reduced 60 basis points to 20.4 percent as investment in various training programs and technology tools improved sales per hour across its divisions.
Also helping profitability was improved inventory turns. Inventory increased less than 1 percent, compared to a total sales gain of 6.7 percent. A stronger U.S. dollar reduced reported inventory in the quarter. On a currency-neutral basis, inventory increased less than 3 percent, still well within our standard of having inventory increase no more than half the rate of sales increases.
Looking ahead, Foot Locker said it remains on track with its previous guidance calling for a mid-single-digit comparable sales increase and a double-digit gain in EPS.
In his first remarks since being tapped as Hicks successor, Johnson, who takes over as president and CEO on Dec. 1, expressed his deepest gratitude to Hicks.
The accomplishments of the company over the last five years have certainly been a you true team effort, but clearly, Ken has been the catalyst to build the momentum we have in our business today, said Johnson. He’s been an inspirational leader to everyone, a true friend, coach, and mentor to me, and I can hardly thank him enough for all he’s done, but Ill give it my best shot. Ken, thanks very, very much from all of us at Foot Locker.
Hicks, who will continue as executive chairman until the companys annual meeting in May 2015, heralded many of the factors that supported the companys consistently strong performance over the last five years and presented it with substantial growth opportunities ahead over the near-, medium-, and long-term horizon.
These include efforts to differentiate its banners through unique merchandise, marketing and most recently, new store designs. In Europe, Foot Locker has increased its penetration through organic growth as well as the successful integration of Runners Point Group. Hicks added, Our European business has held up financially through challenging economic times and continues to be a significant profit generator for the company.
Childrens overall has become a more meaningful part of our overall business, both in the U.S. and internationally, where childrens is running ahead double-digits. Another strong success has been its investments in its dot.com business, which have been growing at close to a 40 percent pace for over the past two years.
In womens, Hicks declared that 602, a newer concept tested over the last several years, now sits as a billion-dollar opportunity for us. Hicks also credited very strong partnerships, which can be seen in the depth of our merchandise assortments, the variety of vendor shop-in-shops weve developed in concert with them, and crucial for our future, the alignment of our key growth strategies with theirs.
Finally, Hicks pointed to the successful pay off from investments in store remodels, in systems, in facilities, and above all, in our people, to improve our capabilities and productivity.
With that, Hicks add, Let me stop and just say again how grateful I am for the opportunity Ive had to lead this tremendous organization over the last five-plus years as its CEO. With all due respect to all the many other fantastic people Ive worked with over the years, this has certainly been the best job of my career, and Ill miss it.
That said, I know that this is the right time for me to hand the baton to Dick. He’s ready and has earned the privilege of leading this great company on the next leg of its journey to being the leading global retailer of athletically-inspired shoes and apparel.
