At its Investor Day on Monday, Mary Dillon, Foot Locker’s new CEO and president, outlined an ambitious “Lace Up” growth plan and said progress is being made in repairing the company’s relationship with Nike. However, shares of Foot Locker fell $2.43, or 5.8 percent, to $39.83 as earnings for the current year were guided sharply below analyst targets as the business undergoes a “reset.”
Foot Locker expects earnings in the range of $3.35 to $3.65, which is down from $4.95 in 2022 and compares with Wall Street’s consensus target of $4.15.
Dillon, who formerly led the Ulta beauty chain, said the reset in 2023 will focus on simplifying the organization, closing underperforming businesses, reinvesting resources in areas with higher potential for profitable growth, and investing in technology to improve personalization and other digital capabilities. The Lace Up plan includes a relaunch of its Foot Locker and Kids Foot Locker banners as well as a revamping of its loyalty program.
In connection with its new strategic direction, the company set the following long-term financial targets for fiscal years 2024 through 2026:
- Total sales growth: 5 percent to 6 percent
- Comparable sales growth: 3 percent to 4 percent
- Square footage growth: approximately 5 percent
- EBIT margin rate: 8.5 percent to 9 percent by 2026
- EPS growth: low- to mid-twenties
She noted that Foot Locker has already begun simplifying the organization with the closure of its team sales/Eastbay business, as well as the Foot Action chain and the Sidestep chain in Europe. On Monday, Foot Locker announced it was transitioning most of its Asia business to a licensed model.
“2023 is a year where we will reset the business – our relationship with our brands our banner repositioning and store optimization, and begin to execute on our cost savings while at the same time investing in technology and new capabilities and our global brand platform,” said Dillon. “So that in 2024 and beyond, our core banner focus, new concepts and better digital and loyalty capabilities will drive sustainable growth.”
Foot Locker also on Monday reported earnings for the fourth quarter and year that were below year-ago levels amid promotional pressures but topped analyst estimates.
Dillon said the Lace-Up growth plan was informed by Foot Locker’s “most exhaustive consumer segmentation study yet” that explored shopping occasions and motivations for consumers within the sneaker market and identified five sneaker-buying consumer segments:
- The Sneaker Maven: The biggest segment in the marketplace, Sneaker Mavens are sneaker-obsessed shoppers who represent themselves through their shoes.
- Fashion-Forward Expressionists: Shoppers “who want to look and feel cool and fashionable and sneakers play a big role in that,” said Dillon.
- The Active Athlete: Shoppers who prioritize performance when shopping for shoes and often add an apparel item to their shopping trip.
- Quality Seeker: Practically-minded shoppers focused on well-fitting shoes and well-known brands.
- Deal Finder: Shoppers who focus on price as their highest priority.
Dillon said Foot Locker as a company over-indexes with Sneaker Mavens and “captures a strong business” with Fashion-Forward Expressionists. Said Dillon, “Both of these segments skew younger and are more diverse. And while they over index in their love of Nike and Jordans, they also have other brands in their consideration set like Adidas, Puma, New Balance and Converse. And you may have guessed, we have an incredibly strong relationship with that customer. They love the brands we carry, the energy that we bring to the category, and especially our in-store experience.”
Dillon said Foot Locker plans to leverage its strong positioning in the sneaker marketplace to expand its wallet share with Sneaker Mavens and Fashion Forward Expressionists while broadening its reach to better target Active Athletes, Quality Seekers and Deal-Finders.
One path to further build its relationship with Sneaker Mavens and Fashion-Forward Expressionists is through in-store experiences and collaborations.
“Community stores are located in neighborhoods with a passion for sneakers and those stores have an average order value that’s over 20 percent higher than the balance of the chain and we serve the full-family needs in those stores,” said Dillon. “Our partnership with Crocs is just one example of how we build sneaker culture for our brand partners as well. Seventy percent of our Crocs’ sales are going to women and children and the way that we’re able to connect that brand with sneaker culture and our customers has allowed that brand to both drive more productivity and create higher pricing power than before, especially with exclusive tie ins like Crocs and General Mills.”
She said the relaunch of the Foot Locker brand, new store concepts, new brand partnerships and the relaunch of its loyalty program all share a goal of driving “even more loyalty and growth with these key segments.”
She noted that Active Athletes, Quality Seekers and Deal Finders have different motivations versus the fashion-first consumer segments, but “sneakers are a part of their everyday life and increasingly so over time. Given our current share in those segments, we have the opportunity to broaden our reach and better invite them into our portfolio.”
As an example, she noted that Foot Locker overall in 2022 acquired over 10 million new customers in the U.S. with brands like On Running and Hoka driving two times the acquisition versus other brands. Sixty percent of those new consumers are women.
“Brand partnerships like these are helping us to bring in new customers into our franchise as well as helping them expand to a younger and more diverse customer set that they may not have today,” said Dillon.
In addition to new brands, new store formats and locations will also be key to reaching the underserved segments. As an example, she pointed to a new Power Store in the Dallas-Fort Worth region that has a focus on running and basketball in addition to strong line-up of fashionable sneakers. Said Dillon, “It’s attracting an older and higher income shopper. In fact, the household median income of the Dallas Fort Worth store is 30 percent higher than our average store in the fleet.”
Banner differentiation will also be heightened to better target different segments.
She said, “Foot Locker will continue to focus on the Sneaker Maven, while we broaden Foot Locker’s reach to new segments. As the number one kids-focused sneaker retailer, we believe Kids Foot Locker has the ability to broaden and serve more kids and more occasions. Champs will reposition to go after the more suburban active athlete serving their footwear and apparel needs. WSS has a distinct focus on Hispanic families and more price-sensitive consumers. Atmos serves a premium customer with a focus on Japan and Japanese culture.”
She added, ”So bring it all together, our vision is that by leveraging our sneaker culture, passion, authority and expertise and that of our store teams, we will position our banners to deliver all things sneakers and unlock the inner sneakerhead in all of us.”
The “Lace Up” plan will be guided by the following set of new strategic imperatives:
- Expand Sneaker Culture: Serve more sneaker occasions, provide more choice, and drive greater distinction.
- Power Up The Portfolio: Create more distinction among banners, including re-launching the Foot Locker brand, and transforming the Company’s real estate footprint by opening new formats, shifting off-mall, and closing underperforming stores.
- Deepen Our Relationship with Customers: Reset the company’s loyalty program and elevate customer relationships through enhanced analytical capabilities.
- Be Best-Un-Class Omni: Improve the customer experience online through the full shopping journey.
Discussing its four growth pillars, the first, “Expand Sneaker Culture,” builds on Foot Locker’s heritage with the brand celebrating its 50th year anniversary in 2024, but also its strong relationships with brand partners. Dillon said she has met with all of Foot Locker’s key brand partners since taking over as CEO in September 2022 and indicated that those meetings included constructive discussions about improving allocations from Nike.
In February 2022, Foot Locker announced that Nike’s portion of Foot Locker’s sales would decline to about 55 percent by the fourth quarter of 2022, down from approximately 65 percent in the 2021 fourth quarter. The reallocation is part of Nike’s efforts to emphasize direct-to-consumer sales and consolidate wholesale accounts. Foot Locker also at the time said it would receive less “high heat” or marquee products, such as retro Jordans.
“I’ve met with the top leaders of all of our largest brand partners to begin to share our vision for Foot Locker and our growth plans with them,” said Dillon. “Of course, Nike is our largest brand partner and the leader in the industry. From day one, I’ve been welcomed to the industry by John [John Donahoe, Nike CEO], Heidi [Heidi O’Neill, Nike’s president of consumer and marketplace] and their team and my team and I have spent a great deal of time with Nike revitalizing our partnership, developing a shared vision of the future marketplace, and aligning on growth plans in key strategic areas like basketball kids and sneaker culture. We’ve reestablished joint planning as well as data and insight sharing so that we can better serve customers and the fruits of our renewed commitment to one another will begin to show up in holiday this year, as we build increasing momentum to 2024 in the 50th anniversary of Foot Locker.”
She also inferred that Foot Locker will continue its push to increase its mix of non-Nike brands as consumers seek out more variety and choice. Said Dillon, “There are so many other wonderful brands that our customers love today or are beginning to love. New Balance, Puma, Adidas, Vans, Hoka, On Running, Crocs, Ugg, Brooks, Asics. The list goes on. And I look forward to building collaborative partnerships and plans with all of our key partners as we strengthen our position at the center of sneaker culture.”
The second imperative, “Power Up the Portfolio,” involves reshaping its banner portfolio “with focus, intent and innovation,” including a major relaunch of the Foot Locker and Kids Foot Locker brands to create “clear differentiation for the rest of our portfolio as well as transforming our real estate to support our growth ambitions.”
The third imperative, “Deepen Our Relationship with Customers,” focuses on accelerating its digital reach, including reinventing its loyalty program and building out CRM capabilities to create deeper relationships with customers.
The final imperative, “Be Best-in-Class Omni,” is about “removing friction and having better connectivity between channels to drive a greater penetration of digital on our business.”
She concluded in her comments, “I have complete confidence that we can deliver this plan and I can’t tell you how excited I am to lead the transformation of this company. We have, I would say, a few things to remind you about. We’re in an amazing industry. We have strong partnerships with our brands. And we are clear-eyed about the actions that we need to take to simplify and make our business more efficient. That said, we are just as clear about the possibilities ahead. And as we begin to execute against these strategic imperatives and get after our Lace up plan, we believe we truly will unleash the inner sneakerhead in everyone.”
For the fourth quarter ended January 28, total sales slipped 0.3 percent, to $2.33 billion and were down 3.6 percent on a currency-neutral basis. Sales topped Wall Street’s consensus estimate of $2.15 billion.
Comparable-store sales grew 4.2 percent, driven by increased traffic and improved access to inventory, resulting in broad-based strength across brands and regions.
By category, footwear led the way, up mid-single digits while apparel was ahead low-single-digits. Sales ran above guidance every month of the quarter with particular strength in December, especially on the key holiday shopping days.
By concept, Foot Locker led the growth in North America, up 13.2 percent; followed by WSS, up 10.6 percent; and Kids Foot Locker, up 4.1 percent. Champs Sports’ comps declined 10.4 percent. In EMEA, same-store sales grew 12.7 percent at the Foot Locker banner and 40.0 percent at Sidestep. In Asia Pacific, comps were up 5.7 percent for the Foot Locker banner.
Gross margins eroded 290 basis points compared with the prior-year period, driven mainly by higher markdowns on increased promotional activity across the industry. SG&A expense decreased 10 basis points to 22.3 percent as savings from its cost optimization program offset inflation.
Net income in the quarter tumbled 81.6 percent to $19 million, or 20 cents a share, from $103 million, or $1.02, a year ago. On an adjusted basis, non-GAAP net income decreased 37.8 percent to $92 million, or 97 cents a share, from $148 million, $1.46, a year ago but was well above Wall Street’s consensus estimate of 51 cents.
For the year, sales were down 2.4 percent to $8.75 billion but inched up 0.9 percent on a constant-currency basis. Same-store sales slid 1.9 percent. Net income was down 61.7 percent to $342 million, or $3.85, from $893 million, or $8.61, a year ago. On an adjusted basis, non-GAAP earnings were off 37.4 percent to $473 million, or $4.95, from $755 million, or $7.27.
For the current year, Foot Locker expects:
- Sales to be down 3.5 percent to 5.5 percent including about 1 percent positive impact from the extra week in the 53-week year.
- Comparable sales are expected to be down in the range of 3.5 percent to 5.5 percent
- Square Footage Change is expected to be down 4 percent
- Licensing Revenue is expected to be around $20 million
- Gross Margin to be in the range of 30.8 percent to 31.0 percent, down from 32.0 percent in 2022;
- SG&A Rate in the range of 22.6 percent to 22.8 percent, up from 21.7 percent in 2022; and
- Non-GAAP EPS in the range of $3.35 to $3.65 (including 15 cents a share benefit from the extra week), down from $4.95 in 2022.
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