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Foot Locker Explains Why Running Stumbled in Q4

Facing headwinds from Covid-related closures in Europe and Canada and inventory delays due to congestion at domestic ports, Foot Locker saw comparable sales fall 2.7 percent in the fourth quarter, missing consensus estimates of a 4.8 percent gain.

On the whole, however, chairman and CEO Richard Johnson said the specialty athletic retailer saw sequential improvement as the quarter progressed as a low double-digit decline in November was followed by modestly positive comps in December and January. Basketball and comfort trends were highlights in the quarter.

“Our overall performance shows that our teams were able to perform at a high level and remain focused on our customers,” Johnson said on a call with investors Friday morning. “Our results were fueled by a solid product pipeline, an exciting holiday campaign and healthy customer demand. As a result, we drove strong full-price sell-through, healthier margins and higher inventory productivity and several of our divisions comped positive in the fourth quarter.”

In a Nutshell: According to chief commercial officer and executive vice president Andy Gray, both Foot Locker’s footwear and apparel categories saw declines in the low single digits, while its accessory business was down in the high single digits.

In footwear, results were mixed as declines in Europe offset gains in North America. Women’s and kids’ footwear saw increases in the high single digits and mid-single digits, respectively. Men’s footwear, meanwhile, experienced a high single-digit decrease.

Gray described men’s basketball footwear as “a bright spot in the quarter.” Led by a strong pipeline of releases from Nike, particularly from its Jordan Brand, and “compelling” additions from Puma and Reebok, the segment delivered a low single-digit increase, Gray said. Men’s running, however, experienced a double-digit decrease, “primarily due to a shift in the launch calendar related to Yeezy.”

Women’s and kids’ also led the way in apparel with “healthy” double-digit and low single-digit gains, respectively, Gray said. Johnson noted that though comfort trends around fleece remained strong in the fourth quarter, inventory pressure hurt Foot Locker’s “ability to entirely meet that demand.”

Though chief financial officer and executive vice president Lauren Peters said Foot Locker achieved its goal of being at a healthy inventory composition at year-end, she said levels are lower than the company would like. At quarter-end, inventory was down 23.6 percent compared to the low single-digit sales decline. On a currency-neutral basis, inventory decreased 25.5 percent.

“I think our inventory levels will certainly begin to normalize over the quarter,” Johnson said. “We’re working with our vendor partners to look for alternate routing, etc., but… having great sales is a good thing to have, right.” Still, with port back-ups causing two- to three-week delays, he said inventory delays had a “material” impact on the quarter.

Covid-related closures also played a role over the fourth quarter. During the period, Peters said Foot Locker’s stores were open for roughly 90 percent of potential operating days. This had a major regional split, she added, as U.S. banners remained up for nearly 100 percent of the period, while Foot Locker Europe and Canada’s numbers were at approximately 60 percent.

In an effort to localize its strategies, Johnson said Foot Locker launched a new North America operating structure in the fourth quarter that creates four distinct regions, each with its own leader and customer experience team.

“Our goal is to put a hyper-local lens on underserved primary and secondary markets by customizing our outreach to individual neighborhoods,” Johnson said. “Coupled with our community store strategy and partnerships with local brands, schools and organizations, this will enable us to sharpen our connectivity with our consumer.”

Johnson noted Foot Locker tested the strategy in the Northeast last year. “Encouraging results” there, he said, gave the company the confidence to expand the program across North America and begin testing it in Europe, the Middle East and Africa.

At year-end, Foot Locker’s cash and cash equivalents totaled $1.68 billion, while the debt on its balance sheet stood at $110 million. Its total cash position, net of debt, was $785 million higher than at the same time the prior year.  During the fourth quarter of 2020, Foot Locker spent $27 million to repurchase 660,347 shares.  For the full year, it repurchased 968,547 shares for $37 million.

Net Revenue: Fourth-quarter comparable-store sales decreased by 2.7 percent, “largely due to Covid-related store closures and backlog at the U.S. ports, along with traffic declines in our largest global tourist markets,” Peters said.

Total sales declined 1.4 percent to $2.19 billion, compared with sales of $2.22 million in the fourth quarter of 2019. Excluding the effect of foreign exchange rate fluctuations, however, total sales fell 3 percent.

Sales for fiscal 2020 totaled $7.55 billion, a 5.7 percent drop compared with the $8.01 billion in sales it saw in 2019. “This is a noteworthy result, given the significant top-line pressure we experienced in Q1 of 2020,” Peters said.

Full-year comparable-store sales fell 5.9 percent. Excluding the effect of foreign currency fluctuations, total sales declined 6.3 percent.

Net Earnings: Despite overall sales declines, Peters said healthy product demand and lower promotional activity on fresh activity resulted in gross margin improvement, both in dollars and on a rate basis. This, she added, helped partially offset higher selling, general and administrative expenses, resulting in the mid-single-digit earnings per share decline it saw in the quarter.

Foot Locker reported net income of $123 million, or $1.17 per share, for the 13 weeks ended Jan. 30, a 7.9 percent decrease from the prior-year period. On a non-GAAP basis, it earned $1.55 per share, a 4.9 percent decrease from $1.63 per share a year earlier.

Looking at fiscal 2020 as a whole, net income totaled $323 million, or $3.08 per share, well below the $491 million, or $4.50 per share, it recorded in 2019. On a non-GAAP basis, earnings per share fell 43 percent from $4.93 to $2.81.

CEO’s Take: “Looking to fiscal 2021, with robust product tailwinds at our back, we believe we are set up with momentum,” Johnson said. “That said, the bottleneck situation at the ports remains in flux. Our merchant teams are working hard to maximize productivity and full-price sell-through. We should gradually begin to see receipt flows and inventory levels [normalize].”

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