Foot Locker has a new CEO. Effective Sept. 1, president and CEO Richard “Dick” Johnson is hanging up his cleats, with former Ulta Beauty head Mary Dillon replacing him in both roles. Dillon will also become a member of the Foot Locker board of directors.
The retirement and transition comes as the footwear retailer fights through macroeconomic headwinds that drove a second-quarter sales dip of 9.2 percent to $2.07 billion on net income of $94 million. As such, the company lowered its 2022 sales and earnings guidance.
Wall Street seemed pleased with the quarter, however, with adjusted earnings of $1.10 per share coming in well ahead of the 79 cents per share estimated by a Refinitiv analyst poll. Stock surged more than 23 percent in Friday morning trading on the news.
In a Nutshell: As the retailer continues to shift further away from Nike’s shadow amid the global sneaker giant’s wholesale pullback, it is entering a new partnership with another major sports business to help fill the merchandising void where brands including Adidas, Hoka, Puma and On Running are already pouncing on the opportunity.
Foot Locker is teaming up with Fanatics to offer the retailer’s licensed sports merchandise assortment across apparel, jerseys, headwear and hard goods on its owned websites. The assortment features teams and players from top leagues and sports properties, including the NFL, NBA, MLB, NHL, WNBA and NCAA. Fanatics, which is now using Quiet Platforms’ supply chain network, will fulfill all the online orders.
The changes so far are driving sales growth. Overall, non-Nike core product sales at Foot Locker increased in the high-single digits, the retailer said.
In the earnings call, Johnson highlighted how Dillon’s strengths align with the direction the specialty athletic retailer is moving toward. In Dillon’s eight-year tenure as Ulta Beauty CEO, she led revenue compound annual growth rate (CAGR) of 16 percent and oversaw the tripling of the company’s market capitalization.
“Certainly, as we think about the digital opportunity, as we think about the things that Mary accomplished with Ulta, her understanding of off-mall retailing and big box retailing—all things that we’re moving towards—she became a logical choice,” Johnson said. He called Dillon “a great choice to take the…leadership over at the company and move us into the next chapter and the next phase.”
By the end of 2022, Foot Locker expects 26 percent of its store fleet (494 locations) to be off-mall, up from 21 percent (421 locations) in 2021. In 2020, just 16 percent of Foot Locker stores (341 stores), were not tied to a mall. This is in large part thanks to the $1.1 billion acquisition of the WSS and Atmos footwear banners last year.
And the stores have at least been driving traffic, which is up low-double digits. However, both units sold and average selling price declined in the high-single digits, the company said.
Footwear was dealt the biggest blow, as sales in the quarter dipped in the low-double digits. Apparel saw a sales decrease in the mid-singles, while accessories shot up low-double digits.
As of July 30, merchandise inventories were $1.64 billion, up 52 percent compared to the $1.08 billion at the end of the second quarter last year. Current inventory quality and age are “healthy,” positioning it well for the back-to-school season and the third quarter overall, the company said.
Andrew Page, chief financial officer of Foot Locker, said in the earnings call that the retailer expects inventory growth to slow through the end of the year.
“We still expect it to be up at the year end, but meaningfully lower than what you’re seeing at the end of Q2,” Page said. “Over the last two years, especially during Covid, a lot of the opportunities to pull different levers were not available. Now, as we look at our inventory again, we feel really good about the freshness of it. We feel really good about how it’s going to be responsive to consumer demand for back-to-school and during the holiday season.”
Page noted that the company can take advantage of vendor allowances or potential order cancellations, and can make better use of returns as supply chain constraints ease up.
Gross margin declined by 340 basis points (3.4 percentage points) to 31.7 percent compared with the 35.1 percent margin in the prior-year period. The margin decline was driven mainly by higher markdowns, as the promotional environment started to normalize after last year’s unusually favorable backdrop, followed by supply chain costs and occupancy deleverage.
Foot Locker downgraded its sales guidance for 2022 in the face of the foreign exchange pressures and the divestiture of its Eastbay Team Sales division. The retailer now expects sales to decline 6 to 7 percent from last year, a dip from the original forecast calling for a drop of 4 to 6 percent.
Comparable sales are expected to dip 8 to 9 percent, narrowing from the original projection of the “upper end of down 8 to 10 percent.”
Adjusted earnings per share is now anticipated to be between $4.25 and $4.45, a downgrade from the upper end of the original $4.25 to $4.60 range.
At quarter-end, the company’s cash and cash equivalents totaled $386 million, while debt was $455 million.
Net Sales: Total sales decreased by 9.2 percent to $2.07 billion, compared with sales of $2.28 billion in the second quarter of 2021. Excluding the effect of foreign exchange rate fluctuations, total sales dipped by 6.1 percent. On a three-year basis, total sales are still up 16.4 percent from 2019 levels.
Second quarter comparable-store sales decreased by 10.3 percent versus record sales levels from last year, when stimulus checks helped keep business afloat.
In North America, sales decreased 16.1 percent, with Foot Locker U.S. sales dipping in the low-double digits. Foot Locker Canada saw a low-single digit increase in sales. Both the Champs Sports and Kids Foot Locker banners saw high-teens sales declines.
Foot Locker’s other markets had better luck. EMEA sales growth was 4.5 percent, with mid-single-digit growth in Foot Locker Europe and low-single-digit growth at Sidestep. And Asia-Pacific saw the best results at 17.7 percent sales growth. Asia was up approximately 30 percent in total sales, while Pacific accelerated in the high teens.
Net Earnings: Foot Locker reported second-quarter net income of $94 million, or 99 cents per share, for the 13 weeks ended July 30, 2022, compared with net income of $430 million, or $4.09 per share, for the corresponding prior-year period.
On an adjusted basis, the retailer earned $1.10 per share, compared with adjusted earnings of $2.09 per share in the prior-year period.
Operating income came in at $139 million, down from $264 million in the year-ago period.
“I mean, the market got pretty promotional when you look at what happened in June and in the first half of July. I think we’re back near the 2019 levels,” Johnson said. “There’s not a lot of science behind it, because everybody has different situations with their inventory levels, but my hope is that the industry learns that we can sell full-price product, and the consumer has an appetite for it. I think it’s a little bit temporary as people fight their way through some of the inventory bulges that you’ve heard reported and the numbers that we talked about today. But I think that the inventory has rationalized its markdown cadence a little bit.”