31 May Foot Locker’s Shares Pop As Q1 Shows Some Recovery
Shares of Foot Locker Inc. jumped $9.35, or 20.2 percent, to $55.74 on Friday after the sneaker leader reported first-quarter earnings that came in well ahead of Wall Street’s targets.
On a conference call with analysts, Foot Locker officials indicated the performance was aided by more on-trend footwear styles arriving from top vendors. But the vendor makeup is changing, led by a resurgence for Nike with many styles, as well as strength in Vans and Fila, making up for some softening at Adidas, Puma and Converse.
Albeit a small part of the business, apparel was particularly strong, boosted by Nike and Adidas, as well as Champion and Fila. Strong inventory management, including aggressively exiting slow sellers, also boosted margins.
In March, Foot Locker officials said they expected comparable sales at the start of 2018 to be similar to or slightly worse than those experienced in the second half of 2017, but the 2.8 percent comparable sales decline in the first quarter represented an improvement over the trend witnessed over the prior six months.
The 2.8 percent comp gain in the quarter ended May 5 came in ahead of Wall Street’s consensus expectation calling for a 3.9 percent drop. By month, comps were down high-single digits in February and turned slightly positive in March with the benefit of an Easter shift. The Easter shift then negatively impacted April, which showed a comp decline in the low-single digits.
Total first quarter sales increased 1.2 percent, to $2.03 billion, also ahead of Wall Street’s average target of $1.96 billion. Excluding the effect of foreign exchange rate fluctuations, total sales eased 1.5 percent.
Earnings before charges slid 3.3 percent to $174 million, or $1.45 a share, well ahead of Wall Street’s consensus target of $1.25.
Net income came to $165 million, or $1.38 per share, after charge of $12 million charge related to the company’s pension litigation, and represented a decline of 8.3 percent versus the year-ago period.
On a conference call with analysts, Dick Johnson, CEO, said the company’s core men’s footwear category was down low single digits in the quarter, reflecting the combination of a growing running category, a “somewhat improving but still down” basketball category and a slight decrease in casual styles.
Men’s basketball was down low-single digits. Johnson said Foot Locker is starting to see some of the benefits of Nike’s tighter distribution of the Jordan brand across the marketplace, along with improved full-price sell-through of Jordan Retros. The company continues to see the reduced Jordan allocations presenting a top-line headwind over the next few quarters, but is expected to sequentially lessen through the year. While signature basketball was down overall, strength is being seen in Lebron, led by both the game shoe and the Soldier. The PG, Paul George’s shoe, also posted healthy gains.
Running continued its momentum with a low-single digit comp increase, benefiting from new innovative platforms through Nike such as the Air Max 270, VaporMax 2.0 and the Epic React as well as the Explorer Endura from Adidas. Solid gains were also seen in Nike Tuned Air, now an exclusive to Foot Locker Inc.
Within casual footwear, “heat around Vans Classic styles and Fila Disruptor” was offset by softness in select styles from Adidas, Puma and Converse to lead to the slight decline.
Women’s footwear declined low double digits. Lauren Peters, CFO and EVP, said women’s footwear was again adversely impacted by a lack of new on-trend offering to offset last year’s strong demand for Puma Fenti product and select Adidas silhouettes. Like men’s, kids footwear was down low-single digits. Average selling prices in footwear were up while units were down.
Apparel was a bright spot, up double digits with gains across all genders, while accessories was down double digit due to weakness in socks, hats and insoles. In apparel, both ASP and units were up, reflecting continued healthy demand for premium assortments.
“The strength in our apparel business was relatively broad-base, with gains across most of our geographies, channels and genders,” said Johnson. “These strong results were led by branded assortments from Nike and Adidas, as well as through a resurgence of 90s-influenced brands like Champion and Fila.”
Johnson called out Champion as “the standout amongst several brands that performed very well.” The primary drivers across apparel were tees, fleece, shorts and infant sets.
By channel, stores collectively posted a 3.1 percent comp decline, while comp sales at the company’s direct-to-customer channel were essentially flat. As a percent of total sales, DTC was 13.9 percent for the quarter, flat to last year.
Overall store traffic was down low-single digits for the quarter, with the company’s U.S. banners experiencing stronger traffic than international banners.
Among banners, the best performance came from Kids Foot Locker U.S. with a high-single digit comparable sales increase. The gains were driven by strong double-digit gains in apparel and a mid-single digit increase in footwear. The performance benefited from improved availability of premium styles in kid sizes versus the year ago. Johnson said, “Kids Foot Locker benefited from many of the same trends that drove our men’s business including strong Jordan Retro sell-throughs and the Air Max platforms.”
Foot Locker in the U.S. saw a low-single digit comp gain. Said Johnson, “The positive results were fueled by the Nike Air Max platforms, Jordan Retro, Air Force Ones and Vans in footwear. Adidas, Nike NBA, Nike Tees and Jordan led the way in apparel.”
Eastbay was also up low-single digits.
Among the laggards, Footaction, Champ Sports, Foot Locker Canada and Foot Locker Asia Pacific were each down mid-single digits.
Foot Locker Europe posted a low-double digit comp decrease, while Runners Point and Sidestep were both down double digits. Footwear in Foot Locker Europe was down low double-digits and apparel declined low-single digits.
Johnson noted that Foot Locker Europe has historically experienced a higher penetration of Adidas than the company’s U.S. banners, and had been benefitting even more from the broad momentum from Adidas in recent years, but is now particularly feeling some weakening in the brand.
Said Johnson, “While Adidas is still a vibrant and exciting brand, the demand from our fast-moving consumer has come off that peak, which has led to a more promotional environment. Looking forward, Adidas has recently put some new listing to the marketplace, like the Deerupt, and we have seen some improving demand from this platform as we shifted into warmer weather.”
Foot Locker Europe also faced some headwinds in Puma, due in large part to the tough footwear comparisons against last year’s Platforms and Baskets programs. In line with the U.S. banners, Foot Locker Europe has “seen growing excitement” from other brand offerings, including the various iterations of Nike Air Max, Vans and Fila.
“While we expect these new offerings will drive more full price selling, we still have some work to do in Europe near-term in order to clear through some of the slower moving styles,” said Johnson. “We anticipate that the Foot Locker Europe business will progress in the back half of the year as we improve the depth of upcoming styles from Nike, Adidas, Champion, Vans and Fila, just to name a few.”
Both Champs Sports and Footaction benefited from strong performance styles from Nike, including Max Air and the Air Force Ones. Conversely, however, both banners were impacted by difficult Jordan Retro comparisons. On a positive note, both banners posted strong high-single digit comp gains in apparel.
The women’s footwear weakness overall had the biggest impact on the 602 concept, which saw a double-digit comp decline in the quarter.
Johnson said Foot Locker overall remains optimistic that women’s will improve as the year progresses.
“Some of the miss on the women’s side is really very, very high-level launch specific from last year,” said Johnson. “The Fenti fancy product from Puma last year, the Rihanna product, was phenomenal. And there is nothing replacing it in the marketplace right now. But that exposure goes down as we get later in the year and with some of the great Max Air platforms that are coming, with some of the Adidas product that’s coming. … She is very much into Vans these days. So, we feel very good about the women’s footwear business getting better in the back half.”
Gross margins decreased to 32.9 percent from 34 percent a year ago. The lower rate reflects a 60 basis points decline in the company’s merchandise margin rates and a 50 basis points of deleverage of the company’s occupancy and buyers compensation. The lower merchandise rates were primarily the result of higher markdowns to maintain inventory balance.
Inventories were down 5.4 percent versus the 1.2 percent sales increase overall. In constant currencies, inventories were down 7.1 percent.
Despite the higher markdowns, the overall gross margin came in better than the guidance provided on the company’s Q4 conference call, “which reflects our customer’s positive response to our improving position in more on trend styles,” said Peters.
The SG&A expense rate increased to 19 percent of sales from 18.5 percent in the first quarter of 2017, primarily reflecting significant investments being made in digital operations as well as wage pressures and legal settlement costs that partially offset by about $5 million of Hurricane Maria related insurance proceeds.
For the year, Foot Locker basically reiterated the company’s prior guidance that sees improving trends throughout the year. Beginning with the second quarter, comparable sales are expected to improve and to be flat to up slightly, and Foot Locker is still planning for a low-single digit comparable sales increase in Q3 and Q4, strengthening within that low-single digit range as the year progresses. For the full year, comps are still expected to be a flat-to-low single digit comp sales gain.
Second quarter gross margin is likely to improve by about 20 to 50 basis points. Merchandise margins are expected to begin to recover in the second quarter, driven by improved product flows. Occupancy cost is also expected to benefit from a shift of about $50 million of sales into Q2 related to the impact of last year’s 53rd week.
The Q2 SG&A expense rate is projected to increase as a percent of sales by 110 to 140 basis points due to increased digital investments. For the full year, Foot Locker continues to expect solid double-digit EPS growth over the $3.99 earned in 2017 on a non-GAAP 52-week basis.