Foot Locker's Mixed Fortunes: Growth Amidst Challenges and a Market Dip
In the ever-evolving retail landscape, Foot Locker has been on a journey of transformation, striving to adapt and thrive. On Wednesday, the company announced a significant milestone as its comparable sales grew for the first time in six quarters. This growth, a 2.6% increase in same-store sales during its fiscal second quarter, surpassed the 0.7% uptick that analysts had expected according to StreetAccount. Moreover, its gross margin expanded for the first time in over two years, signaling positive progress in its financial health. CEO Mary Dillon, who has been at the helm for about two years, has been implementing the “Lace Up Plan” to turn the company around. In a press release, she affirmed that the plan is working, highlighting that the top-line trends strengthened throughout the quarter, including a solid start to the Back-to-School period. She also noted with satisfaction the stabilization achieved in the Champs Sports banner, which had previously been a drag on overall performance.
However, despite these encouraging trends, the company’s shares took a significant hit, closing more than 10% lower. This unexpected drop came in contrast to the positive developments on the sales and margin fronts.
Looking at the detailed financials, in the three-month period ending Aug. 3, Foot Locker reported a loss of $12 million, or 13 cents per share, compared to a loss of $5 million, or 5 cents per share, in the same period a year earlier. Excluding one-time items, the loss stood at 5 cents per share. Sales did see a slight increase, rising to $1.90 billion, up around 2% from $1.86 billion a year before.
For the current fiscal year, Foot Locker largely maintained its guidance and anticipates sales to be in a range of a 1% decline to 1% growth from the prior year. This is better than the 0.4% decline that analysts had projected according to LSEG. The company also stood by its adjusted earnings per share guidance, expecting earnings to fall between $1.50 and $1.70, which is mostly ahead of the $1.54 that analysts had anticipated. Dillon has been actively working on multiple fronts to transform the company. One key aspect has been repairing the relationship with its major brand partner, Nike. Additionally, she has been closely examining the company’s extensive yet aging store fleet, which accounts for about 80% of its sales. This year, Foot Locker plans to invest $275 million in upgrading its stores, with the goal of having two-thirds of its fleet remodeled by the end of fiscal 2025. In an interview with CNBC, Dillon revealed that these store investments are already yielding positive results, such as increased conversion rates, larger basket sizes, enhanced profitability, and better performance in the women’s business. The company is also taking steps to optimize its global footprint. It has decided to close its stores and e-commerce operations in South Korea, Denmark, Norway, and Sweden. In Greece and Romania, it will rely on a third party for operations while aiming to expand its reach in these regions. In total, 30 of its 140 stores in the Asia-Pacific region and 629 in Europe will either be closed or operate under a new arrangement. The Champs Sports banner, which had been weighing down the overall performance, is showing signs of improvement. During the quarter, its comparable sales were down 3.9%, which is an upgrade from the 25.3% decline witnessed in the previous year. Another significant move is the planned relocation of Foot Locker’s global headquarters from New York City to St. Petersburg, Florida, slated for late 2025. The company intends to maintain only a limited presence in New York City going forward. The relocation aims to build on the company’s existing presence in St. Petersburg, enhance collaboration among teams across different banners and functions, and reduce costs. Dillon told CNBC that this move is expected to increase margins by 0.2 percentage points by 2027, emphasizing that it’s not solely about cost savings but also about facilitating better collaboration. Even as the core consumer faces the pressures of persistent inflation and high interest rates, Foot Locker is managing to drive sales by improving stores, products, and the overall customer experience both online and in physical locations. This indicates that Dillon’s efforts are gradually paying off. As of Tuesday’s close, Foot Locker’s shares are up more than 5% this year, in contrast to Nike’s stock, which has fallen more than 21% in the same period.
In a retail environment where demand has undeniably slowed and consumers are becoming more discerning about where they spend their money, execution has become crucial. Dillon remains confident, stating that the company’s strategies are building momentum as it looks towards the remainder of the year. She believes that the actions being taken will position Foot Locker for profitable growth over the next 50 years and create long-term shareholder value. Overall, while Foot Locker is facing its share of challenges, its ongoing efforts to transform and adapt suggest that it has the potential to navigate the choppy retail waters and emerge stronger in the long run.