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Foot Locker’s DTC Business Jumps to 33% of Total Sales

Foot Locker had a second quarter in line with its previous update given earlier this month, with comparable store sales rising 18.6 percent and total net income reaching $45 million, or 43 cents per share. The comparable sales increase matched the expected 18 percent, while the 43 cents per share outpaced initial guidance of 38 cents to 42 cents per share. Direct-to-consumer sales surged 173 percent as shoppers continued to flock online.

In a Nutshell: While the news for the quarter is very positive, the footwear and athletic apparel retailer still has a way to go to fully bounce back from the effects of the Covid-19 pandemic, as Foot Locker faced a $65 million net loss for the first six months of the year.

As of Aug. 21, Foot Locker had over 2,850 stores open across North America, EMEA and Asia-Pacific region, representing more than 90 percent of its global store fleet. Approximately 260 stores remain temporarily closed, including 174 mandated closures in California and 28 stores in select U.S. cities impacted by disruptions from recent social unrest.

In the second quarter, the company’s merchandise inventories were $1.19 billion, 2.7 percent lower than at the end of the second quarter last year, largely due to actions taken to clear aged product and first-quarter-related backlogs. When measuring using constant currencies, inventory decreased 3.7 percent.

Merchandise margin rate decreased 700 basis points, primarily due to Foot Locker’s use of markdowns to clear aging assortments and a higher mix of DTC products, which carry higher freight costs.

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The company’s cash totaled $1.37 billion, while the debt on its balance sheet was $121 million, which reflects the repayment of the $330 million previously borrowed from its credit facility.

As part of its cash preservation measures, Foot Locker did not pay a dividend or repurchase any shares during the second quarter. But with its strong liquidity position and more stable cash outlook, the company’s board of directors reinstated the quarterly dividend program and declared a quarterly cash dividend on the company’s common stock of 15 cents per share, which will be payable to shareholders of record on Oct. 16.

“The second quarter was truly a testament to our team’s ability to be nimble and to our financial and operational discipline. We delivered a meaningful increase in sales, managed our expenses tightly, and made progress towards our goal of improving our inventory position,” said Lauren Peters, executive vice president and chief financial officer.  “Looking ahead, we believe the company is well positioned financially to maneuver through the evolving Covid-19 pandemic. As a first step, the board reinstated the dividend at a cautious but meaningful level to begin returning cash to shareholders. As always, the board will continue to evaluate the dividend program on a quarterly basis.”

The company is not providing a full-year outlook for the remainder of 2020, owing to the uncertainty of the Covid-19 crisis.

In terms of capital expenditures, Foot Locker invested approximately $31 million into its business during the quarter, bringing the year-to-date total to $83 million. The company integrated a new payments system globally, and implemented a new order management system designed to improve a wide range of critical functions including inventory management, buy online ship-from-store, BOPIS, merchandising, reporting and analytics and notifications to customers.

The company now expects to invest $156 million in capital for the full year, up slightly from a prior guidance with the increase due to the restart of select IT and real estate projects.

During the second quarter, Foot Locker opened 18 new stores, including its first store in Macau, remodeled or relocated 26 stores, and closed 31 stores.  As of Aug. 1, the company operated 3,100 stores in 27 countries in North America, Europe, Asia, Australia and New Zealand. In addition, 134 franchised Foot Locker stores were operating in the Middle East, as well as four franchised Runners Point stores in Germany.

Net Sales: Foot Locker reported second-quarter sales of $2.08 billion, up 17.5 percent year-over-year and beating Wall Street expectations by approximately $8 million. Total sales increased 17.3 percent on a constant-currency basis.

Direct-to-consumer sales skyrocketed 173 percent throughout the quarter. As a percent of total sales, DTC rose to 33.2 percent for the quarter, up from 14.3 percent last year. By month, May comparable sales were down high-single digits whereas June and July were much stronger, each producing high-double digit gains.

The Foot Locker team attributed the digital jump to the strength of the company’s product assortments, including pent-up demand for a number of launches in classic styles. Results were also aided by the elevated promotional activity as the retailer sought to clear inventory.

Apparel comparable sales were up mid-single digits for the quarter, with women’s and kids’ apparel up double-digits and men’s up mid-single digits, according to Peters in an earnings call. Footwear was the strongest category, up “strong” double-digits.

Foot Locker Pacific was the best region in terms of performance, with comparable sales up double-digits. Foot Locker Europe, where consumers have been more conservative coming out of the stay-at-home orders and where digital penetration is not as strong, posted a high-single digit comp decline.

Net Earnings: Net income for the second quarter was $45 million, or 43 cents per share, a 25 percent dip compared to net income of $60 million, or 55 cents per share in the corresponding prior-year period. But the numbers were a notable improvement over the first quarter, which saw Foot Locker incur a net loss of $98 million.

Excluding pre-tax charges of $19 million related to the wind down of the Runners Point banner and the Eastbay restructuring, $18 million for inventory and store repair costs incurred for the recent social unrest and a $1 million charge related to a pension reformation, the second quarter earnings were 71 cents per share on a non-GAAP basis compared to 66 cents for the second quarter of last year.

Foot Locker’s second-quarter gross margin rate decreased to 25.9 percent from 30.1 percent a year ago.

CEO’s Take: “Despite the challenging backdrop of the pandemic, and social unrest, we achieved strong second quarter results, led by our digital business, with a return to growth in both the top and bottom line. As our global fleet of stores reopened, our customers responded with enthusiasm and energy to our assortments and visited our stores with a high intent to purchase,” Richard Johnson, president and CEO of Foot Locker, said. “As the COVID-19 situation continues to evolve, we believe we have the right strategies and strong leadership in place to strengthen our customer connectivity, deepen our strategic relationships with our vendors, navigate the challenges ahead, and emerge from this period better positioned than ever.”