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Foot Locker CEO Sees ‘Very Favorable’ Apparel Trends Heading into Back to School

Foot Locker’s second quarter results were boosted by women’s and kids’ footwear, and strong demand for apparel and accessories.

In a Nutshell: Foot Locker Inc. saw second quarter income rise nearly tenfold, as sales increased across categories.

“Many of the trends we saw in the first quarter continued into the second quarter, with the combination of robust demand and fresh and lean inventory driving meaningfully lower levels of promotional activity and resulting in a gross margin of 35.1 percent compared to the 25.9 percent in the prior year period,” Andrew Page, executive vice president and chief financial officer, said.

On July 31, the company’s merchandise inventories were $1.08 billion, 9.5 percent lower than at the end of the second quarter last year. At quarter-end, Foot Locker’s cash and cash equivalents were $1.85 billion, while the debt on its balance sheet was $112 million.

The company’s total cash position, net of debt, was $1.73 billion, higher than the same period last year by $484 million. During the second quarter, Foot Locker invested $36 million in its store fleet, digital capabilities, supply chain and other infrastructure. The company also announced two strategic acquisitions, WSS and Atmos, that total $1.11 billion and are expected to close late in the third quarter.

CEO Dick Johnson dove into the thinking behind those acquisitions. “Starting with WSS, the management team has built a strong and scalable business model, led by their off-mall real estate strategy, full family offerings, focus on the Hispanic customer and the commitment to elevating the communities that it serves,” he told Wall Street analysts on a call Friday. “We see a path to approximately $1 billion in sales in the next five years from the $425 million in fiscal 2020 driven by the differentiated WSS consumer concept that we can bring to new U.S. markets and favorable future demographics of the United States marketplace.”

Johnson believes adding a “premium globally recognized brand” like Atmos will elevate the company’s overall profile and attract new consumers. “Over the past two decades, Hommyo-san, the founder of Atmos, and his team have built a digitally-led and culturally-connected premium lifestyle brand that sits at the center of sneaker culture in Asia and beyond,” he said. “This acquisition will represent a highly strategic entry point into the important Japanese marketplace with immediate scale as we continue our expansion across Asia-Pacific and tap into youth and sneaker culture across the globe.

“As many of you know, Atmos has a long and storied history of iconic collaborations with a variety of strategic brand partners that create unrivaled hype in our industry,” Johnson continued. “They are also best-in-class when it comes to retail design in experiential stores located in key markets and shopping districts that serve as inspiring and critical touch points in the omni customer journey. Atmos generates over 60 percent of its revenue from their digital channels and has a strong global following across social media platforms.”

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Foot Locker expects “low double-digit sales increases” from the Atmos in the near term.

With the market’s “inflationary” tendencies at the moment, “supply chain headwinds and some of the freight headwinds are causing all of the input costs to be looked at very closely,” Johnson said. But because Foot Locker’s “customers very resilient when it comes to pricing,” spring product price increase are “conceivable,” he added.

With back-to-school normalizing somewhat versus 2020, apparel trends have been “very favorable” heading into the shopping season, Johnson said.

Though basketball footwear’s performance has waned in recent years, Foot Locker is banking on the category in the current quarter. “We anticipate the culture of basketball will continue to be a key revenue driver in the third quarter,” Johnson said, describing Nike, Adidas and New Balance products as “creat[ing] excitement and driv[ing] momentum.”

What’s more, Foot Locker attracted new shoppers with seasonal merchandise and non-performance, lifestyle-friendly footwear. The company “brought new consumers to our business with an increased focus on the seasonal category, delivering a high double-digit increase with gains in Crocs, Ugg and Birkenstock,” Johnson noted.

According to Page, Foot Locker “exited the quarter with positive momentum and are cautiously optimistic about the outlook for the back-half of 2021.”

“Recognizing we are still operating in an uncertain environment due to COVID-19, we continue to keep a close eye on the business, including temporary store closures and supply chain challenges, and we remain disciplined with expense management,” he said.

During the second quarter, Foot Locker opened 16 stores, remodeled or relocated 23 unit and closed 57 stores. As of July 31, the company operated 2,911 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.

Sales: Total sales for the second quarter ended July 31 increased 9.5 percent to $2.28 billion compared with sales of $2.08 billion in the same period last year. Compared to the second quarter of 2019, total sales increased 28.2 percent.

Second quarter comparable-store sales increased 6.9 percent.

Earnings: Net income for the quarter was $430 million, or $4.09 per share, compared with net income of $45 million, or 43 cents per share, for the year period, and with $60 million, or 55 cents per share, earned in the second quarter of 2019.

CEO’s Take: Johnson said: “Our strong performance this quarter reflects the health of our category, the deep engagement we have with our customers and the strategic nature of our relationships with our vendor partners. This quarter reflects strong results in our women’s and kids’ footwear business, along with broad demand for our apparel and accessories offerings, which combined with more limited promotional activity, led to the outstanding top and bottom-line results.”