Overview of company's operations.
Foot Locker reported record income for the quarter.
Footwear.
Within the footwear segment, mens and children's wear performed the best. Basketball shoes were the best sellers in men's footwear, especially marquee basketball and key player shoes. Customers particularly liked the shoes with color. Several of the retro shoes were popular, with the Retro Jordan selling out immediately. Adidas and Converse were also strong. The customer has shown a renewed interest basketball shoes because of: (1) new lightweight technology and ankle support, (2) the current basketball stars have expanded, are performing well and staying out of trouble, and (3) the appearance of the shoes has improved. Foot Locker is better positioned in basketball than its competitors because it has exclusives and the best assortment.
Runnings shoes had small gains. Lightweight running products such as Nike Free and the New Balance Minimus had strong sales. Foot Locker also had good gains in the Nike Prestige and from the ASICS, New Balance, Brooks and Mizuno brands. The lighter running shoes are lower ticket, so the popularity of those brands put some pressure on the business.The women's business was mixed. There were gains in technical and lightweight running, and in classics, such as the Samoa from Adidas, as well as the Nike performance running. The more basic programs in the Women's portfolio were weak.
Apparel.
Foot Locker has continued to strengthen its apparel business and the business was strong, especially in North America. Nike, Addidas and Under Armor sold well. Foot Locker added a larger assortment of performance socks, including Nike Elites and Adidas and Jordan. The private label brand is also improving. Some of the team apparel that was private label is now being done by the brands, which have higher margins. As to J.C. Penney selling Nike apparel, it is at a different level. Foot Locker's apparel is higher quality.
Foot Locker also extended its assortment of Snapback Hats from New Era for kids. The apparel for kids is growing, but starting from a lower base. Foot Locker plans to expand its store for kids, with pop-up stores during back-to-school and is opening kids stores in some international markets.
Stores.
This was the first positive quarter for Lady Foot Locker in quite a few quarters. The company is focusing more on apparel than shoes. Lady Foot Locker added bra and bottom bars to most of its stores and increased other apparel. The apparel sales were higher than footwear, but both were positive. Under Armour and other vendors are working hard with the company in the Lady Foot Locker stores. Foot Locker is in the process of redesigning the Lady Foot Locker format that will display the apparel better, and it is testing a new Women's concept that will put up a new store designed from scratch, but results on these changes will take time. Foot Locker believes there is great growth potential in the women's stores. Although Lady Foot Locker is currently performing well below the men's stores, based on the limited competition, it has the potential to perform the same as the men's stores.
Foot Locker believes team sales and services is also a long-term growth potential and plan to use the infrastructure of Eastbay to achieve this growth.
The CCS division had positive comps both in the direct-to-customer segment and in the stores. Foot Locker is encouraged that the postive comps mean that the rebranding that it started in February is resonating with customers, and it is encouraged that CCS will be able to contribute top and bottom line growth over time.
Foot Locker will be expanding the prototype for Champs in Tyrone Plaza to 10 stores. It is encouraged by the results in the 3 current prototype stores. The results from the new Foot Locker prototype in the Smith Haven Mall in Long Island are also encouraging. Opening new prototypes stores for the Foot Locker model is about 6 months behind the Champs model, since Champs was started earlier and marketed earlier.
Europe.
The European business improved in the middle of the quarter when the Nike Free was introduced, and Foot Locker expects momemtum with that shoe to increase. Apparel sales have been down, but as the weather ges warmer, the company expects apparel sales to improve. Although Europe is challenging, Foot Locker believes it is well positioned to maintain its market position, as some of the less well-financed competitors have gone away. Foot Locker is pleased so far with the stores it has opened in eastern Europe and it plans to open more stores in Poland and the Czech Republic.
Future prospects.
Foot Locker is optimistic about consumers responding favorable to the new trends and colors in footwear. It believes it will benefit from the World Cup and the London Olympics, which will build consumer awareness of its products and increase the desire of people to become more fit. It also will be offering Olympic-themed products in its stores and offering Olympic-related products from Adidas and Nike, such as shoes that will look like some of the shoes worn by the athletes. Nike will be offering shoes with new technology that will show you how high you can jump or how fast you can move. Foot Locker will also benefit from the absence of uncertainty about an NBA or NFL season this year.
Overview of markets.
Foot Locker expects Europe to remain challenging. Greece is “somewhat of a basket case,” but Foot Locker only has a few stores there. Southern Europe is challenging. Foot Locker has a strong presence in Italy, but the stores have been, and are continuing to be, productive and profitable, although business has been down a bit. The Northern European countries are performing better, and some of those economies are improving. Overall, the European customer is simply challenged in how much they can buy, and therefore, the fashion merchandise is not moving as well in Europe.
Financials.
Comparable sales increased by 9.7 percent for the quarter, and the 2-year comp gain was 22.5 percent. Sales in Q1 increased 9.1 percent in the stores, and 16.5 percent in the Direct-to-Customers segment. Comp sales were strong in March---likely due to warm weather and the earlier Easter---and they decelerated during the quarter. So far, May sales are increasing in the high-single digits. All divisions had gains in Q1 except Europe, which had a mid-single digit decline. Europe's decline lessened over the quarter, and it is currently showing an increase in May. Foot Locker expects a mid-single digit comp increase in sales company-wide for 2012 and a decline in Europe for 2012 in the low single digits. Of the various segments, Champs Sports gained 20 percent from Q1/2011, with a 2-year increase of more than 40 percent. The Direct-to-Customers segment increased 16.5 percent, with a 2-year gain of more than 40 percent, if ccs.com is excluded. CCS was lower than the rest of the segments, but still had positive comps. Foot Locker in the U.S., Footaction and Foot Locker Canada all had gains around the double-digit mark.
Apparel had nearly 20 percent gains. There was strength in apparel in the United States, but weakness in Europe. The Kids footwear business in Champs and Foot Locker Canada had gains exceeding 30 percent.
For the non-Eastbay websites, sales increases have varied from 30 to 40 percent. Foot Locker believes the websites are under-penetrated, and it is coordinating more between the stores and the websites. In Europe, it has websites in the U.K., Benelux, France, and Germany and will be adding websites in the countries of southern Europe.
Gross margin was 34 percent, an increase of 130 basis points. 100 of the basis points was due to leverage of fixed occupany and buying costs. The remaining 30 basis points was improvement in merchandise margins. U.S. margins increased across almost all divisions, while margins in Europe were down slightly. Footwear margins were higher than apparel margins, with the highest gains in women's and kids footwear, and the margins for footwear are still increasing. Customers have accepted price increases on footwear, especially given the new technology for footwear, and product flow programs kept the product fresher allowing for full price selling. However, there is some pressure on margins because the difference between the retail price and the price Foot Locker pays is getting narrower. Price increases from vendors were higher than normal in 2012, and labor prices will continue to raise the prices in 2013, but the increases will be more modest and targeted. Prices charged by vendors are unlikely to decrease. Foot Locker expects the gross margin increase for 2012 to be 50 to 60 basis points.
SG&A expense was 19.4 percent, which was 110 basis points less than Q1/2011. The company kept tight control over store wages to improve sales per payroll hour. The pace of growth of SG&A expenses will be about 60 to 80 basis points per quarter. It spent $2 million more in marketing, which has been paying off.
Foot Locker reported first quarter net income of $.83/share, an increase of 38 percent over Q1/2011. This was the highest quarterly earnings Foot Locker has ever reported.
Because the U.S. dollar is stronger than it was a year ago, it is more difficult to translate international profits into U.S. dollars. The impact of translating international profits for Q1 was an EPS decrease of less than $0.01 per share. The company expects an impact of about $0.01 again in the second quarter and $.05 for the year based on current rates.
Foot Locker opened 25 stores in Q1, most of which were in Europe. It closed 34 stores, most of which were in the U.S. At the end of Q1, it had 3,360 stores, 9 less than at the beginning of the year. If a store is not performing and it is not strategically important, Foot Locker will pull out of the store.
The company had a1.1 percent decline in inventory, while achieving an 8.7 percent increase in overall sales.
At the end of Q1, Foot Locker had $909 million of cash and short-term investments, $110 million more than the end of Q1/2011. The first quarter typically represents a peak in cash flow. The board just approved a $10 million increase in 2012 capital expenditures, raising them to $170 million, for new projects in the Women's business and technology upgrades in allocation and warehouse management system.
Foot Locker raised its dividend by 9 percent to $.18/share at the beginning of 2012 and repurchased 878,700 shares in the first quarter for $27 million. The total repurchase for the year will be $400 million.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
No comments:
Post a Comment