Led by basketball and lifestyle running footwear, Foot Locker Inc. reported second-quarter earnings jumped 29.3 percent, to $119 million, or 84 cents per share. Results handily exceeded Wall Street's consensus estimate of 69 a share.
“We continued to achieve broad-based and consistent strength across geographies, banners, channels, and categories,” said Richard Johnson, president and CEO.
Total sales increased 3.3 percent, to $1.69 billion. Excluding the effect of foreign currency fluctuations, total sales increased 9.9 percent.
Comps leapt 9.6 percent. By month, comps across the company were up low double digits in May and up high single digits in both June and July.
By segment, comps in its stores grew 8.6 percent, while its direct-to- customer business again led the company’s performance with an 18.8 percent sales hike, said Lauren Peters, EVP and CFO, on a conference call with analysts.
Within the direct-to-customer segment, the domestic store banner dot-com businesses collectively jumped sales more than 40 percent while Eastbay generated a mid-single-digit increase. Overall, direct-to-customer sales increased to 11.3 percent of total sales, up from 10.5 percent a year ago.
Within its store businesses, international divisions produced the strongest sales results, with all regions – Europe, Canada, and Asia-Pacific – posting double-digit comp increases. In the U.S., the Foot Locker chain and Footaction divisions were both up high-single digits. Kids Foot Locker and Lady Foot Locker/602 were both up mid-single digits. Champs Sports produced a low-single-digit comp gain. Lady Foot Locker marked its fifth consecutive quarterly comp increase, and its first positive comp on top of a prior year comp gain “in quite some time,” said Peters.
FOOTWEAR SEES DOUBLE-DIGIT COMP GAIN
Among categories, footwear again led the way, posting a low double-digit sales increase while apparel improved significantly, posting a mid-single digits sales increase. Overall, soft goods sales were up low-single digits due to certain accessory categories which faced difficult comps.
Within footwear, running and basketball both posted a double-digit increase. Said Peters, “In fact, in a testament to the current broad-based and consistent strength of our business, each major region posted a double-digit sales increase in both basketball and running footwear.”
Comps in kids and women's footwear were up double digits while men’s were up high-single digits.
In running footwear, lifestyle running continued to pace the gains, led by Roche and Air Max styles from Nike and ZX Flux from Adidas, said Johnson. Although much smaller platforms, FL is also working on lifestyle running offerings with other vendors, including Puma, New Balance, Asics and Saucony.
On the basketball side, Jordan “continues the to be tremendously strong brand around the globe,” said Johnson. Jordan retros and classics in particular performed well. Marquee player styles in the U.S. continued to grow with ongoing strength in LeBron, KB and Kobe, coupled with “stellar growth” of models from newer athletes in Kyrie Irving with Nike and Stephen Curry with Under Armour.
“The softer parts of our footwear business continue to be in casual, in particular canvas and volcanized shoes,” said Johnson. “On the other hand, the launch of the new Chuck Taylor 2s from Converse performed quite well recently, indicating that when there is some new or different casual product in our business, our customers know to come to us to find them.”
Although seasonally a small business, some boot assortments from Timberland and Nike were brought in earlier this year and the initial sell-throughs were positive.
APPAREL UP MID-SINGLE DIGITS
Apparel was “up solidly” at the Foot Locker chain and Footaction in the U.S., driven by bottoms with Nike, Jordan shorts and pants from Adidas.
At Footaction, jogger bottoms from smaller lifestyle brands also sold well, “keeping that banner on the forefront of style for its core customer,” said Johnson.
Branded tech fleece pants and shorts sold well in Europe where apparel is rebounding with a double-digit comp gain in the quarter. Europe's private label and controlled brands gained ground in shorts and T's and its soccer business continued to develop into a more meaningful part of assortments there.
Champs Sports again saw a comp decline in apparel due to continued downsizing of “what had been a very sizable licensed business,” said Johnson. But comps at the chain improved sequentially, also driven by the healthy branded bottoms trend as well as its private label Champs Sports gear mid shorts and jogger pants.
Overall traffic companywide was up slightly in its stores during the quarter with its international divisions seeing stronger trends than the U.S. Said Peters, “We believe the geographic traffic differences have a lot to do with a much stronger dollar compared to a year ago, which has led to less tourist traffic in the U.S.”
Average selling prices were up again in the quarter, in line with recent trends. Conversion also improved due to the effectiveness of its marketing programs, investments in associates training, and product demand.
GROSS MARGINS GAIN 60 BASIS POINTS
Gross margins improved 60 basis points to 32.6 percent due to the strong sales. The company’s merchandise margin rate improved 20 basis points on a currency-neutral basis, with a lower markdown rate partially offset by a lower initial markup rate. FX negatively impacted margin by 20 basis points.
SG&A expenses was cut 140 basis points to 19.5 percent of sales with the aid of “disciplined expense management” and sales leverage. With the help of weaker foreign currencies, Foot Locker also saw a 3.5 percent decrease in reported SG&A dollars.
Inventories at the end of the quarter were down 1.3 percent compared to a sales increase of 3.3 percent. Inventory increased just over 3 percent on a currency-neutral basis compared to a 9.9 percent total sales increase on the same basis. Peters said inventory turns are now close to the company’s goal of 3 times, the only target the company hasn't reached under goals set in 2010.
Foot Locker spent $58 million on capital expenditures in the quarter, bringing its year-to-date total to $118 million. A significant portion of the capital has been invested as planned on enhancing its store fleet, including a combination of new stores, the largest number of which continues to be in Kids Foot Locker, and remodel projects, with activities spread across most of its banners and regions. Many of these projects include a partnership space with Nike, Jordan, Adidas, Under Armour or Puma. Continued investments were also made in its digital capabilities both in the U.S. and internationally, where it operates e-commerce sites in 10 countries. For example, it significantly upgraded its digital platform in Europe during Q2.
REMODELS/IN-STORE SHOPS REMAIN KEY FOCUS
Addressing some key strategic initiatives, Johnson said the company will continue to invest in the remodel programs and expects to have touched at least 30 percent of its Champs stores and its Foot Locker fleet in the U.S. by the end of 2015. Footaction will also undergo more remodels as it moves into roll-out mode with a Garden State Plaza design.
The company will continue to develop and roll out vendor partnership spaces such as House of Hoops, which now counts 165 in the U.S. and another 25 internationally. The Foot Locker chain has five Puma labs and Footaction has four Jordan Flight 23 shops with another one slated to open on State Street in Chicago next month. The first Armory with Under Armour opened a few months ago inside a Champs Sports and is “doing well.” Added Johnson, “It's too early to say much about it other than the fact that we and Under Armour are both learning from that store and we're discussing an expansion of the test at some point next year.
Kids Foot Locker is continuing to roll out Fly Zones in partnership with Nike with almost 30 in place now. With the addition of 20 stores, overall Kids Foot Locker were up double digits in the quarter. Kids footwear sales in the other banners were also strong, up double digits and it continues to add Kids Foot Locker stores in other markets outside the US.
Foot Locker Europe saw sales in all its big six countries climb double digits.. Banner segmentation work is continuing in Germany to better position the Runners Point and Side Step banners to complement its position with Foot Locker b banner in that country. Said Johnson, “It's still premature to draw firm conclusions from that work. We'll be able to give you a better idea of a potential banner expansion strategy towards the end of the year when we gathered more experience executing our multi-banner offerings in Germany and have developed our capital plans for 2016 and beyond.”
At the same time, the company is reviewing expansion opportunities for the Foot Locker banner in Europe and may look to accelerate its store growth plan, especially in underpenetrated markets such as France and Spain.
In its digital business, the company doubled the size of its test of the Eastbay performance zones in Champs Sports with the project reaching eight stores.
WOMEN’S DELIVERS FIFTH STRAIGHT COMP GAIN
The women’s business reported its fifth consecutive comp gain, an achievement not seen in almost a decade. Apparel was up high-single digits, led by Nike, Adidas, and Under Armour. Lifestyle running footwear from Nike and Adidas was another similar source of strength on the women’s side, while performance brands such as Asics and Brooks remain key brands with the gender and Reebok is also beginning to gain traction within the company’s women’s business in classic running shoes and apparel.
Ninety percent of its 205 women’s stores are Lady Foot Locker with 10 percent 602 but 602 will be the company’s “primary women's banner in the future.” It expects to end the year with over 30 602 stores and will continue to build awareness for the banner.
The women's business in its other banners continues to be strong, with double-digit footwear gains in Foot Locker and Champs Sports in North America, Europe and Asia-Pacific.
Looking ahead, FL continues to expect a mid-single digit comp gain for 2015, which is what the company was seeing month-to-date. With the later start of back-to-school this year, management is optimistic that sales will further build momentum in coming weeks and arrive “at the strong end of the mid single digits, both this quarter and over the second half of the year,” said Peters.
The company continues to predict double-digit EPS gains in Q3 and Q4 are achievable based on current sales trends.
Peters said that while the second-quarter outperformed and the company expects a ongoing flow of “exciting products” to support its BTS and holiday business, “we will continue to plan the business cautiously because we've learned that disciplined planning ensures that our inventory and our expense structures stay in line. The metaphor we use around here is that we don't want to get ahead of our skis.”
