Shares of Foot Locker Inc. vaulted $8.97, or 28.2 percent, to $40.82 on Friday after the sneaker powerhouse reported third-quarter earnings that topped Wall Street’s targets and indicated that results for the full year may exceed guidance.

On a conference call with analysts, Richard Johnson, chairman and CEO, also highlighted a number of steps the company was taking to further align its in-store and online businesses, enhance its digital and supply chain capabilities, and forge even closer partnerships with vendors.

“We are not in this game to get a ribbon for participation,” said Johnson. ”We are in this game to win it. We are partnering with our vendors to win together in connecting emotionally with the customer, creating great experiences and delivering innovative premium product when and where they want it.”

On August 18, shares of Foot Locker plummeted by nearly the same amount – 27.9 percent – after the company’s quarterly results missed expectations by a wide margin and management lowered expectations on the second half. The updated guidance given in August included expectations that comps would decline in the range of 3 percent to 4 percent in both the third and fourth quarter and non-GAAP EPS would decrease between 20 percent to 30 percent in the second half.

In the third quarter ended October 28, earnings dropped 35 percent to $102 million, or 81 cents per share.

The quarter included a $13 million pre-tax charge related to reducing and reorganizing corporate and division staff that had been announced during its second-quarter conference call. Excluding this charge, non-GAAP earnings were down 23 percent to 87 cents a share, exceeding Wall Street’s consensus target of 80 cents.

Revenues were down 0.8 percent to $1.87 billion. Wall Street on average was expecting $1.84 billion. Excluding the effect of foreign currency fluctuations, total sales decreased 2.3 percent.

Third-quarter comparable-store sales decreased 3.7 percent, in line with guidance calling for the decline in the second half of 3 percent to 4 percent.

Comps were negatively affected by the closing of almost 450 stores at some point during the quarter due to hurricanes Harvey, Irma and Maria. Lauren Peters, Foot Locker’s EVP and CFO, said on a conference call with analysts that although business in Texas and Florida recovered for the most part in the quarter, Hurricane Maria shut down all 56 of its stores in Puerto Rico and the Virgin Islands and most of these stores remained closed for a month or more after the storm hit in mid-September The hurricanes were estimated to have lowered its overall comp in the quarter by 20 basis points to 40 basis points.

By month, comps were steady throughout the period, with results in August, September and October all within the quarterly guidance.

Among categories, footwear was “challenged” as expected, down mid single digits. Sales of men’s shoes were down low single digits, kids decreased mid-single digits and women’s posted a double-digit decline.

Running remained the strongest category in men’s footwear, finishing with a high-single-digit comp gain, driven by VaporMax, Air Tuned Max and Air Max 97 from Nike and NMD, Tubular Shadow, EQT and Ultra Boost from Adidas. Although men’s basketball decreased mid single digits, the trend improved over the double-digit decline seen in Q2 and was driven by stronger sell-throughs of select Jordan Retro releases compared to Q2 and other casual basketball styles such as Air Force 1s from Nike.

Men’s casual styles posted a double-digit drop as strong demand for Vans, especially old school and skate high styles, was more than offset by a decline in Converse and a slower start to its Timberland boot business compared to last year.

The kids’ footwear decline was driven by the shifts away from signature basketball and casual court style although, like basketball, the trend improved versus Q2 due to the higher sell-throughs for Jordan Retro releases, a solid running category led by Tubular Shadow and Xplorer, and positive results for the LeBron 15 and LeBron Soldier.

In addition to being impacted by ongoing slow sell throughs of Superstars and Stan Smiths, women’s footwear softened further due to a lack of enough newer hot sellers to offset last year’s strong demand for Puma Fenty, said Peters. The weaker footwear sales had the biggest impact at SIX:02 and led to a double-digit comp decline for that banner.

Among other categories, apparel was up mid single digits with strong gains across most of its geographies and banners. Said Peters, “Branded fleece and wind wear assortments from Nike, Adidas and Champion were the key on trend items during the quarter. Our branded T-shirt business also had a strong quarter.”

ASPs in apparel were up high single digits, reflecting more premium assortments in its inventory, while units were down low-single digits. Children’s apparel was up high single digits. Men’s apparel posted a solid mid-single-digit gain while women’s was up double digits. However, the gain in women’s apparel was largely markdown-driven.

Accessories such as socks and hats comped down double digits in the quarter.

Among its operating segments, direct-to-customer (DTC) posted a 6.1 percent increase, while its stores were down 5.1 percent. In the DTC segment, Eastbay generated a high-single-digit top line increase. Its store banner dot-com businesses in the U.S. and Europe were both up mid-single digits, while digital sales in Canada increased at a strong double-digit rate. Overall, DTC sales increased to 13.8 percent of total sales, up from 12.8 percent a year ago.

Within its store divisions, Foot Locker Canada and Footaction posted solid results, both generating low-single-digit comp increases, led by double-digit gains in apparel and mid-single-digit gains in men’s footwear. The other store divisions posted comparable sales declines. In the U.S., Foot Locker was down low single digits while Kids Foot Locker and Champs Sports were each down mid single digits. Overall, traffic at U.S. stores declined mid single digits.

Internationally, traffic also declined mid single digits. Comparable sales at Foot Locker Asia Pacific and Sidestep were down mid singles, while Foot Locker Europe and Runners Point were both down low double digits. Sales at Foot Locker Europe, which has a relatively high penetration of Adidas, were pressured by further declines in Superstars and Stan Smiths as well as lower-than-expected sell throughs of some other Adidas styles.

Besides the comp decline, the profit drop in the quarter reflects an erosion of 290 basis points in gross margins to 31 percent, and was worse than guidance calling for a decrease of 230 to 250 basis points. The lower rate was driven by a 190 basis point decrease in merchandise margin, a 10 basis point increase in shipping expense and 90 basis points of deleverage on its occupancy and buyers’ compensation expenses. The lower merchandise margin, both year over year and compared to last quarter’s guidance, was the result of higher markdowns, both in store and online. The higher markdowns reflect ongoing efforts to drive traffic and clear slow-moving inventory in the current promotional retail environment.

Despite the markdown pressure, average selling prices in footwear were up low-single digits, while units were down high-single digits.

SG&A expenses increased 30 basis points to 19.7 percent of sales. Expense-management savings initiatives were offset by $7 million of hurricane-related costs, the majority of which was related to damaged or lost inventory. Excluding the hurricane damage, the SG&A margin would have improved 10 basis points.

The $13 million charge taken in the quarter was mainly related to severance. Said Peters, “The changes, while difficult, position us to create a more agile, flexible organization that will concentrate on those strategies that we believe will most effectively drive our long-term earnings growth.”

Inventory ended the quarter down 3.4 percent from a year ago compared to an overall sales decrease of 0.8 percent. On a constant currency basis, inventory decreased 4.9 percent compared to a 2.3 percent total sales decrease. The decline reflects the markdown efforts and helped position the company for holiday receipts.

In his comments, Johnson commented on the reorganization efforts that included the “very difficult and painful step” of laying off employees. The layoffs were necessary “to ensure that Foot Locker will continue to thrive at the center of sneaker culture or, more broadly, youth culture.”

The organizational changes included giving all channel responsibility in the North America region to Jake Jacobs. Having the store division from New York and digital commerce team in Wisconsin managed separately was effective for 20 years but “is no longer the best approach to creating a seamless brand experience,” according to Johnson.

A North America product marketing strategy team, led by Andy Gray, was also established in order to work closely with vendors on developing “unique product platforms and stories” and bringing them to market. Examples given of such programs were Foot Locker’s partnership with Nike on Sneakeasy, NBA Player Editions at House of Hoops and Nike Pro Associates at Foot Locker. Johnson said in the case of Speakeasy, which includes a pop-up that will open during the holiday selling season in New York City with special launches, “Nike is clearly demonstrating what differentiated retail looks like for them, and how their top strategic partners, like us, play a key ongoing role in bringing it to reality.”

Another key initiative is enhancing its digital capabilities, particularly in three areas: a new digital e-commerce platform, mobile-app platform development, and new POS technology. Said Johnson, “We expect to leverage greater visibility of the shopping and buying patterns of individual customers and households into much more effective loyalty and marketing program initiatives, have quicker visibility and access to inventory across our entire enterprise thus speeding up customer access to all of our great product, and create elevating storytelling and alignment between our stores, digital sites and mobile apps, all of which should lead to higher customer satisfaction and ultimately even higher rates of converting shoppers into buyers.”

“Significant” investments are being made in the supply chain capabilities, including reconfiguring its primary warehouse in Kansas to fulfill DTC shipments by the middle of next year. Most had been handled out of its facility in Wisconsin. Mini-distribution hubs in certain major metropolitan areas will also be installed to hold inventory and replenish stores as part of a test. The hubs are expected to reduce the need for backroom retail space and support same-day DTC delivery. Added Johnson, “We are upgrading a facility in New Jersey as well as an existing logistics facility in central Pennsylvania to handle large sections of the East Coast, and we will test other locations in 2018.”

Johnson nonetheless said the “majority of our capital” will be spent on its store fleet, where more than 90 percent of the sales from its banners still occur. Still, with its core customer, young males from about 12 to 25 years old, “essentially born with a mobile device in their hand.” many of those investments will be around keeping customers engaged on social media and in other ways digitally at the store level.

Investments are being planned to open key pinnacle stores in major cities as well as continued remodeling efforts. Johnson also noted that while less-productive stores will be closed, sales and profitability at the “relatively weaker” malls and shopping centers “tended to hold up relatively well this year” and are likely to stay open.

Said Johnson, “Since most of these profitable doors already have low rents and short-term leases, it makes no sense to us to rush and close hundreds of them and leave the customers who still shop in them day in and day out without a clear choice for accessing the premium product we offer.”

Finally, Johnson talked up how the company is counting on its close partnership with vendors to help it manage the disruption facing retail. He said Nike is “on the verge of a major breakthrough in terms of product innovation and customer engagement, and of course we are working closely with them on that,” while Adidas “has certainly proven that they too can compete at the highest levels.”

Other key suppliers also “fill important roles in the athletic marketplace and we collaborate with them constantly on ideas big and small.” Beyond product innovation, the partnerships often involve forming relationships with music artists or rebuilding local playgrounds.

Johnson added, “We intend to continue partnering with our vendors on this challenging, but exhilarating journey, making course adjustments as necessary, as we retain and build on our strong leadership positions in the athletic industry.”

For the fourth quarter, Foot Locker now expects comps to decline 2 percent to 4 percent, slightly better than the previous guidance of down 3 percent to 4 percent. Gross margin is likely to decrease 220 basis points to 240 basis points in Q4 on a 13-week basis, worse than the decline of 150 to 170 basis points previously estimated during its second-quarter call in August. Peters cited the “anticipated need to maintain relatively high markdowns in Q4 to move through slow-moving inventory to position ourselves for a stronger 2018.”

SG&A is likely to increase by 60 basis points to 80 basis points as a percent of sales, better than guidance given in August due in large measure to the recent reduction in its labor force and a timing shift of certain projects into early 2018. In total, EPS is likely to decrease between 15 percent to 25 percent in the fourth quarter. The guidance does not include the 53rd week, which Foot Locker estimates will be worth an incremental 12 cents per share.

Photo courtesy Foot Locker