In a Nutshell: Foot Locker solidified its financial standing in Q1, borrowing $330 million under its $400 million credit facility, cutting full-year capital expenditures by 50 percent to $138 million, minimizing non-essential spending and reducing executive compensation and salaries.
The effects of the COVID-19 crisis and subsequent store closures shrank the athletic retailer’s gross margin rate to 23 percent from 33.2 percent a year ago. Inventory increased by 20.4 percent to $1.458 billion.
“From an inventory perspective, we have been working very closely with our vendor partners to align on the best path forward between supply and demand,” Foot Locker chairman and CEO Richard Johnson said during the company’s Q1 conference call. “This has included canceling or delaying orders, adjusting future orders and securing their assistance to help clear the channel.
“We anticipate a more promotional environment in fiscal 2020,” he added.
As of May 22, Foot Locker had reopened about 45 percent of its global stores and expects to continue reopenings based on local government guidelines. It did not pay rent in April and is working with landlords to forge a long-term solution for the months ahead.
In North America, 900 stores are now open in 31 U.S. states and Canada, on top of 421 stores in EMEA and 102 stores in the Asia-Pacific region.
Foot Locker said it will also furlough the majority of its part-time store members in North America along with a lesser portion in Australia and in its U.S. supply chain network.
By focusing on digital sales, Foot Locker broke its single-day record for e-commerce conversions, processing nearly 200,000 orders.
“We are grateful to those team members who enabled us to fulfill those orders without any interruption, both at our distribution centers and at the select stores we utilized to fulfill BOSS, or buy online, ship from store orders,” Johnson said. “This digital-only focus has accelerated our evolution as an omnichannel retailer, enhanced our customer connections and will continue to benefit us into the future.”
Sales: In the first quarter, sales dropped by 43.4 percent to $1.176 billion, compared to $2.078 billion in the prior-year period and below Wall Street’s $1.58 billion estimate. Comparable sales tumbled 42.8 percent.
By channel, retail sales fell 53.4 percent while DTC sales ticked up 14.3 percent, doubling the channel’s share total sales to 30.8 percent.
“With most of our stores closed since March 17 or approximately half of the quarter, the COVID-19 pandemic weighed heavily on our results as customers held back on nonessential items,” Foot Locker executive vice president and chief financial officer Lauren B. Peters said during the call. “Trends in our business began to improve in early April, when we saw a significant ramp-up in our digital channel, approaching triple-digit comps, driven by pent-up demand for on-trend styles and several high-heat launches.”
During the quarter, Foot Locker consolidated its Runners Point Group business in Europe, converting some locations to Sidestep or Foot Locker stores and closing approximately 40 more.
Earnings: Foot Locker reported a Q1 net income loss of $98 million, resulting in a loss of 93 cents per share, compared to the 49-cent gain Wall Street expected.
CEO’s Take: “Against the backdrop of the pandemic and our global store closures, our team has focused intently on controlling what we can in order to protect our business,” Johnson said. “We have taken full advantage of the investments we have made in technology in recent years in order to stay connected with our customers and serve them online, worked aggressively to protect our financial position and flexibility, and taken actions to ensure we are well-positioned to drive our business forward.”