01 Mar Foot Locker’s Momentum Continues in Q4
Defying a tough holiday selling season, Foot Locker Inc. (NYSE: FL) continued its winning streak in the fourth quarter. Boosted particularly by running and classic footwear styles, comps jumped 7.9 percent in the period on top of last year’s 10.2 percent increase.
For 2015 overall, Foot Locker marked its sixth consecutive year with double-digit earnings per share increases and scored its highest annual sales and profit ever as athletic company.
On the Feb. 26 conference call with analysts, Foot Locker President and CEO Dick Johnson noted the company was able to surpass almost every financial and operational metric from 2014. Sales gains were achieved in all regions, channels, and genders in the most banners and product categories.
“We made substantial progress improving the sales and productivity of all four legs of our product category stool: basketball, running and casual footwear along with apparel,” Johnson said. “As the year unfolded, I believe it became increasingly clear that we have developed a leading position in more than just basketball sneakers.”
In the quarter, net earnings advanced 8.2 percent to $158 million, or $1.14 a share. Excluding non-recurring items, adjusted earnings would have been $1.16 a share, topping Wall Street’s consensus estimate of $1.12.
Revenues rose 5 percent to $2.01 billion from $1.91 billion. Excluding the effect of foreign currency fluctuations, total sales for the quarter increased 8.8 percent.
The quarter’s comp gains were led by Asia Pacific, which delivered a mid-teens comp gain on top of a double-digit increase in the prior year, said Lauren Peters, executive vice president and CFO, on the call. Close behind were Europe, with an increase in the teens, and Canada, was up double-digits.
A disappointment overseas was Runners Point Group, which Foot Locker acquired the German running chain in 2013. Both its Runners Point and Side Step banners were down mid-single digits. The company also took a trade-name asset write-down on SP24.com, the clearance website that Runners Point was operating that Foot Locker has decided to shut down.
The overall direct-to-customer segment banged out a 9.6 percent comp gain. Domestic store banner.com businesses collectively increased sales more than 20 percent, with even faster growth outside the United States. Eastbay sales declined low-single digits. Peters said, “The true performance part of the athletic industry where Eastbay’s assortments are strongest have slowed relative to casual. We also believe the strength of the U.S. dollar kept some Eastbay customers shopping locally in their home markets.”
The company’s domestic divisions all posted solid sales performances with Kids Foot Locker leading the way with a high-single-digit comp gain and a double-digit total increase, factoring in the addition of 13 net new Kids stores during the year. Foot Locker in the U.S., Champ Sports and Lady Foot Locker 602 were each up mid-single digits. Footaction was up low-single digits on top of a double-digit increase in Q4 last year.
By category, footwear once again drove sales gains, up double digits overall in the quarter. Mens footwear was up high-single digits while women’s and kids were both up double-digits. By category running was up in the teens while basketball was up at the low end of mid-single digits. True apparel, meaning tops and bottoms, was up low-single digits while the smaller accessories business including socks and hats posted a high-single digit comp decline. Overall sales of apparel and accessories were down a few basis points.
As seen with other athletic brands and retailers, the early warm winter along the East Coast in the Midwest, helped spur both athletic footwear and apparel sales this holiday season.
Elaborating on some footwear categories, Johnson said running grew in the mid teens during the quarter with double-digit gains in every region. The gains were led by lifestyle silhouettes such as Roche, Huarache and Max Air from Nike and Zed X Flux from Adidas.
Despite a slowdown in sales of some key signature product, basketball still saw growth due to the strength in the Jordan brand, especially in North America; the rise of new marque stars such as Kyrie Irving for Nike and Steph Curry for Under Armour, and momentum in classic basketball styles such as Air Force One.
Johnson also said Foot Locker led the industry in sales of a wide variety of classic sneakers, led by a strong position in the Adidas Original styles such as Superstars and Stan Smiths as well as casual styles from New Balance, Puma and Asics. Its Timberland boot business “performed exceptionally well despite the relatively mild winter weather during much of the quarter,” said Johnson. Athletic and outdoor boots gained fashion favor this holiday season, so while the winter weather wasn’t quite there, the look was still in style.
By month, comps were up in the low end of mid singles in November and accelerated to growth in the teens in December. January early on was running stronger than December but snowstorms and slower distribution of income tax refund checks in the U.S. caused sales to tail off in the last two weeks.
Gross margins in the quarter improved to 32.9 percent from 33.6 percent. Merchandise margin improved 50 basis points due primarily to lower markdowns. The company also achieved leverage of 40 basis points on its relatively fixed buyer and occupancy expenses. These two factors were partially offset by 20 basis points of headwind related to foreign exchanges.
Its selling, general and administrative expense decreased to 19.3 percent of sales from 19.6 percent last year.
In the full year 2015, earnings rose 4 percent to $541 million, or $3.84 a share, on a reported basis and grew 16.1 percent to $606 million, or $4.29, on an adjusted basis. Sales increased 3.6 percent to $7.4 billion. Comps climbed 8.5 percent in 2015.
Regarding some key growth initiatives, Johnson said the core business “continued to perform very well” in the year and is benefiting from ongoing remodels. The company has remodeled approximately 30 percent of its domestic Foot Locker and Champs sports stores and just under 20 percent of its Footaction stores. It has also opened more than 40 shop-in-shops in partnership with its vendors, about half of which were House of Hoops.
Kids overall grew “well into double-digits” across all banners in the year. Besides the U.S., Kids Footlocker opened doors in Europe and Canada and added about 30 new fly zone shops in the U.S. in partnership with Nike.
Foot Locker in Europe delivered double-digit comp gains in almost every country and double-digit growth across all families of business. Key styles from the various Nike modern comfort and Adidas Originals lines as well as Air Max and Jordan drove the gains. Kids Foot Locker is doing particularly well in Europe.
Apparel was down slightly in the quarter and year although profits in the category were up significantly. Foot Locker continues to work with vendors on coming up with the right assortments. Johnson added, “Success has not and will not come overnight; however given how important apparel is to the vendors own growth objectives, we remain highly confident that together we will win with the customer for his or her apparel needs too.”
Foot Locker’s digital business continues to benefit from investments in mobile and desktop sites as well as apps to help create more personalized interactions for customers. The company’s direct-to-customer sales reached 12.7 percent of total sales in 2015, up from 12.1 percent a year ago. Its domestic Footlocker.com and Ladyfootlocker.com businesses were both well above the company’s 10 percent target.
In women’s, footwear saw particular progress. The Lady Foot Locker 602 division delivered its seventh consecutive quarter of comp gains and women’s footwear sales at the Foot Locker banner and Champs Sports increased double-digits for the year. Fifteen 602 stores were opened last year to bring the chain to 30 but the company will be slowing expansion this year to focus on brand awareness, resetting product assortments, relaunching the 602 website and creating 602 experiences inside its New York City flagship stores.
Johnson said 602’s performance is below targets and management believes it overemphasized the performance aspect in apparel at the expanse of fashion.
“We are working hard with our vendors to elevate our product offerings through innovation, style, and scarcity based in many cases on celebrity designs or endorsements such as what we’re seeing with Rhianna,” Johnson said. “As in mens’ apparel this is not a one- or two-season fix and the vendors are highly committed to making this work.”
For 2016, Foot Locker expects to generate a mid-single-digit comp gain and another double-digit percentage increase in EPS. The company will open approximately 90 stores while closing about 100. The store closures will once again be concentrated in Lady Foot Locker and Foot Locker in the U.S.
Peters said that although Foot Locker is planning a mid-single-digit comp gain in each quarter, “the profit flow through challenge may be greatest in Q1 in turn creating a challenge to achieving double-digit EPS growth” in the first quarter.
With the income tax refund shift and difficult comparisons against last year’s NBA All-Star Game being in New York, February’s comp is expected to be up low-single digits. A mid-single-digit comp is projected for the remainder of the quarter.