Foot Locker is turning to Adidas, Hoka, On Running and other major footwear brands to counteract the recent pullback of Nike products, further diversifying the company’s assortment.
The athleticwear and footwear retailer endured a slow start to 2022 amid the decision, seeing first-quarter sales tick up 1 percent to $2.18 billion on net income of $133 million. But CEO Dick Johnson is steadfast in his belief that more partnerships with high-profile labels and up-and-comers will deliver the lift the retailer needs.
In a Nutshell: In a first-quarter earnings call, Johnson highlighted the opportunity in the company’s brand diversification efforts, citing NPD Group data showing that Foot Locker’s overall share of the U.S. active footwear wholesale market stands at roughly 16 percent. Yet outside of its top vendor, Nike, its share is only 5 percent, illustrating the significant opportunity to capture share of other brands.
“We are under-penetrated in virtually all of our brands outside of our top vendor,” Johnson said in the call. “When we look at our brand mix historically, we have not been offering them enough choice such that we have below our average market share nearly all of our brands.”
Enter Adidas, which is making Foot Locker its lead wholesale partner in basketball shoe sales as part of an enhanced partnership that will also see expanded product across women’s and kids’ sneakers and apparel. Across all banners, this new effort will target over $2 billion in annual retail sales by 2025, nearly tripling levels from 2021.
Starting this summer, Foot Locker is partnering with Deckers Brands to bring Hoka running sneakers to select stores and online this year. The company is also doubling the store count where it will sell sneakers from On Running, and “will continue to grow further” from there.
The footwear and athleticwear retailer already entered a partnership with Authentic Brands Group (ABG) in February to bring more exclusive sneakers from Reebok into stores by fall 2022.
Johnson said in the call that the majority of Foot Locker’s top-20 vendors posted sales gains in the quarter, including Adidas, Puma, New Balance and Crocs, with the latter two seeing 50 percent gains.
Currently, non-Nike comparable sales already support the retailer’s assortment rebalance, jumping in the high teens during the period, the company said.
Total apparel and accessories sales increased more than 10 percent, with apparel seeing a high-single-digit revenue boost and accessories sales soaring 30 percent. Footwear felt the absence of Nike, with sales declines in the low-single digits.
Women’s clothing drove apparel’s growth, up more than 50 percent year over year, the company said in an earnings call. Men’s apparel sales increased in the high-single digits, while kids’ clothing declined in the low singles. Women also buoyed the footwear category with low-double-digit growth, while men’s footwear saw a mid-single-digit dip. Kids’ footwear sales dipped in the mid-single digits.
The higher apparel penetration has impacted average selling prices, which fell by mid-single digits in the quarter.
With the addition of the WSS and Atmos banners, both of which Foot Locker acquired in August 2021, the retailer is expected to bolster its off-mall store count from 421 last year to 494 by the end of 2022. Off-mall stores would represent a jump from 21 percent of stores to 26 percent.
Foot Locker expects WSS revenue to rise from approximately $650 million in 2022 to roughly $1 billion in 2024, and is currently doubling the banner’s store fleet, which largely resides in the Southwestern U.S. and caters to a growing Hispanic population. Atmos, the Japan-based sneaker and streetwear retailer, is projected to grow from $220 million in total sales in 2022 to $300 million by 2024. Both retailers have exceeded sales expectations since the deals, according to Foot Locker executive vice president and chief operating officer Frank Bracken.
In the first quarter, Foot Locker opened or converted nine community-driven “power stores,” bringing the retailer’s total to more than 70, closer toward the company’s goal of 300 globally in the next three years.
Bracken said the community and power stores are delivering sales of more than 10 percent above their plan in the past 12 months.
Overall, store traffic in the quarter escalated more than 25 percent as stores that were closed in Europe and Canada throughout the Covid-19 pandemic reopened for business. For the quarter, the company’s global fleet was open 98 percent of available days versus approximately 80 percent of days last year.
Foot Locker still plans to open approximately 100 new doors in 2022, including 40 community and power stores, 27 WSS locations, and nine Atmos stores, while closing a total of 190 stores.
As of April 30, 2022, Foot Locker’s merchandise inventories were $1.4 billion, 37 percent higher than at the end of the first quarter last year.
“We were pleased with the first quarter flow, and that gave us confidence going into the back end of the year that we have the right product and fresh inventory available to really get after back-to-school in the summer selling season,” said Andrew Page, executive vice president and chief financial officer at Foot Locker.
Gross margin declined by 80 basis points (0.8 percentage points) to 34 percent of sales compared with the prior-year period’s 34.8 percent, driven by higher supply chain costs and slightly higher markdowns versus historically low levels.
At quarter-end, the footwear and athleticwear retailer’s cash and cash equivalents totaled $551 million, while debt on its balance sheet was $456 million.
Foot Locker’s total cash position, net of debt, was $95 million, as compared with $1.9 billion last year. During the first quarter of 2022, the Company repurchased 2.7 million shares for $89 million and paid a quarterly dividend of $0.40 per share, for a total of $38 million.
Guidance ranges have remained unchanged from Foot Locker’s previous estimates, but the updated figured are now expected to be closer to the higher end. Earnings per share for the fiscal year ending in late January 2023 are now expected to be at the high end of the $4.25 to $4.60 forecast range, and sales are expected to be at the upper end of the forecast for a decline of 4 percent to 6 percent.
Net Sales: Total sales increased by 1 percent, to $2.18 billion, compared with sales of $2.15 billion in the first quarter of 2021. Excluding the impact of foreign exchange rate fluctuations, total sales for the first quarter increased by 3 percent.
First quarter comparable store sales decreased by 1.9 percent, with apparel significantly outpacing footwear.
Across regions, sales in EMEA had the largest jump at 56.3 percent, while the APAC market saw a 10 percent revenue boost. North America, Foot Locker’s largest market, saw an 11.8 percent decline in quarterly sales.
Net Earnings: Foot Locker reported net income of $133 million, or $1.37 per share, for the 13 weeks ended April 30, 2022, compared with net income of $202 million, or $1.93 per share, for the corresponding prior-year period.
On an adjusted basis, the retailer earned $1.60 per share, compared with the prior-year period’s earnings per share of $1.96.
Adjustments included primarily $6 million of impairments and other charges, including acquisition and integration costs, and $24 million in net losses in the company’s minority interests, such as Israel-based athleticwear retailer Retailors, Ltd.
CEO’s Take: “We see that nearly 40 percent of transactions that have more than one item actually contain multiple brands, meaning consumers mix-and-match their selections across brands, whether it’s multiple footwear brands or a head-to-toe outfit of two or more brands,” Johnson said. “Also, 50 percent of footwear sales from our identified customers come from those who buy from us more than four times over a two-year period. Eighty percent of those frequent shoppers are multi-brand consumers, and overall they purchase approximately three different footwear brands on average.”