Foot Locker had the highest second quarter and highest first half of earnings from continuing operations in the company's history.
The strongest division for Q2 was Kids Foot Locker, which gain more than 20 percent in comp store sales. Champ Sports, Foot Locker in the U.S. and Footaction were also strong. CCS.com was weak.
Kids business was strong in all divisions that sold children's merchandise. The Somoa from Adidas, padded collar Chucks from Converse and Slides had strong gains.
Basketball shoes were strong again and the Jordan retro launches performed well. Other marquee player shoes from LeBron, Kobe, Rose and Durant also did well during Q2. Running footwear was flat. Footlocker had good performance in lightweight and technical running, but the higher-priced Air running did not do as well.
Apparel sales had a 20 percent comp gain in the United States, but declined in Europe and Canada. Kids apparel performed well with Brand Jordon performing the best. Apparel sales were also strong at Lady Foot Locker. Apparel margins are still below footwear margins.
Foot Locker had 3,354 stores at the end of Q2. It opened 47 new stores and closed 62 so far this year. It has opened 20 stores in Europe and several House of Hoops stores in the United States. It expects to close about 100 stores during 2012.
Foot Locker now has 11 stores of the Champs prototype open throughout the country. It has a new Foot Locker prototype open at the Smith Haven Mall on Long Island and it is doing well so far. It has upgraded its apparel at Lady Foot Locker and has seen good gains as a result. It is also remodeling 14 Lady Foot Locker stores to highlight the apparel offerings. Finally, Foot Locker plans to open 3 new concept stores for women before the holidays, which will have more focus on apparel and different merchandise than Lady Foot Locker. It is also exploring the use of WiFi for its customers in its stores.
In terms of e-commerce, Foot Look is continuing to enhance the Eastbay website with features such as the Athletic Resource Center (ARC), where athletes can measure their performance against world-class athletes, and Eastbay Edge, which allows football players to see how equipment works from real players. Foot Locker is also expanding its e-commerce site in Europe. It is strengthening its business in the United States by allowing online purchases to be returned to stores and by allowing customers to buy online and pick up the merchandise in the store. It is testing new payment options, such as PayPal, Google Wallet and Isis.
Foot Locker's average selling price has increased and new features on new shoes have resulted in higher prices for those shoes. Foot Locker's growth has come in the shoes that cost more than $100 because there are more shoes at that level and more features. The big jump in prices has already occurred, but there will still be some pressures from wages and manufacturing costs. So far, the customer has been willing to pay for high end shoes and the price increases have not slowed demand. The price increases will moderate through the rest of fiscal year 2013.
Foot Locker is cautiously optimistic for the second half of 2012. Product innovation from its vendors is still at a fast pace. However, the election and fiscal cliff has the potential to negatively impact the economy and Europe's short term future is uncertain.
Financials.
Foot Locker had a 9.8 percent comp gain in Q2. Domestic stores increased comp sales by the low-teens, except for Lady Foot Locker, which was flat. Europe's comp sales were also flat. Total sales in Europe increased by the mid-single digits, since Foot Locker is operating 30 more stores in Europe than a year ago. The remainder of Foot Locker's international divisions had comp gains in the mid single digits. The Direct-to-Customer unit gained 18.1 percent, although CCS.com declined by low single digits. Foot Locker expects comp gains for the year at the high end of mid-single-digits.
Gross margins were 31.3 percent, an increase of 90 basis points. Merchandise margins in Europe declined, although Europe margins are still higher than U.S. margins. In the United States, Foot Locker is seeing price increases from its vendors. It is passing some, but not all, of the price increases on to the customers. It is offsetting the difference by reducing its markdown rates. Foot Locker expects gross margins to improve by 30 to 40 basis points in the second half of the year.
Non-GAAP EPS, absent a tax benefit, was $.38/share. Currencies negatively impacted earnings by $.01/share. Foot Locker expects currencies to negatively impact earnings for the year by $.05/share.
Inventory declined by 3 percent, mostly due to weaker foreign currencies. Inventory was flat on a constant currency basis and up 1 percent on a per-store basis.
Foot Locker purchased approximately 2.1 million shares during Q2 for approximately $37.5 million. It has increased its projected capital spending for 2012 to $170 million. It is possible that its capital spending may increase significantly in the next few years.
The transcript of the earnings conference call can be found on Seeking Alpha at the following link:
http://seekingalpha.com/article/814521-foot-locker-management-discusses-q2-2013-results-earnings-call-transcript
Copyright 2012 Jaygo's Earnings Conference Call Summaries
This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.
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