Foot Locker Blows Past Earnings Expectations

Retailer’s sales grew 5% to $1,780 million, surpassing estimates of $1,764 million

f1Specialty athletic retailer Foot Locker Inc. (NYSE: FL) announced its Q2 FY16 financial results on August 19th, 2016.

The New York-based Company operates as an athletic shoes and apparel retailer in two segments: Athletic Stores and Direct-to-Customers. The Athletic Stores segment retails athletic footwear, apparel, accessories, and equipment under the Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and SIX:02, as well as Runners Point, and Sidestep brands. As of January 30th, 2016, it operated 3,383 mall-based stores in the U.S., Canada, Europe, Australia, and New Zealand. The Direct-to-Customers segment sell athletic footwear, apparel, team licensed products, and private-label merchandise through websites including eastbay.com, final-score.com, eastbayteamsales.com, sp24.com, footlocker.com, and ladyfootlocker.com. The Company also operates 64 franchised stores. Read more about Foot Locker’s financial results below.

Q2 FY16 financial highlights

Source: Foot Locker
Source: Foot Locker

During Q2 FY16, Foot Locker’s total sales grew 5% to $1,780 million compared to $1,695 million for the corresponding prior-year period. Excluding the negative impact of foreign currency fluctuations, total sales grew 5.4%. Comparable-store sales rose 4.7% due to gains from basketball, running, classic footwear and apparel. The Direct-to-customer segment witnessed comparable sales gain of 7.1%. Sales of store banner.com businesses increased in the teens in the U.S.

The better-than-expected Q2 FY16 results reflect the successful tapping of strategic opportunities in children’s apparel, shop-in-shop expansion in collaboration with its vendors, store banner.com business, store refurbishment and enhancement of assortments. Foot Locker is expecting the strong results to continue over the next few quarters. International expansion, especially in Europe, was another growth driver. The company is also enhancing its e-commerce platform to better align its business with the changing customer preferences.

Foot Locker’s gross margin expanded 40 basis points to 33% of sales from 32.6% in the year-ago period due to lower markdowns in stores, partly offset by a contraction in merchandise margin in Direct-to-Customers business. The Company’s selling, general, and administrative expense (SG&A) rate expanded 20 basis points to 19.7% of sales from 19.5% during the reporting quarter.

In all, Foot Locker’s net income increased to $127 million, or $0.94 per share, in Q2 FY16, compared to net income of $119 million, or $0.84 per share, in the year-ago period.

H1 FY16 financial highlights

During H1 FY16, Foot Locker’s net sales grew 4.3% to $3,767 million versus the prior-year period. Year-to-date comparable store sales rose 3.7%. Excluding the effect of foreign currency fluctuations, total year-to-date sales increased by 4.6%. The Company’s net income increased to $318 million, or $2.33 per share, compared to net income of $303 million, or $2.14 per share, for the corresponding period in 2015. EPS for H1 FY16 jumped 8.9% compared to the same period in 2015.

Other highlights

Store Update: During the quarter under review, Foot Locker opened 23 new outlets, remodeled or relocated 64 outlets, and shuttered 18 outlets. As of July 30th, 2016, the Company operated 3,401 outlets across 23 countries in North America, Australia, New Zealand and Europe. Apart from these, there are 54 franchised Foot Locker stores in South Korea and the Middle East. Germany had 15 franchised Runners Point stores.

Cash flow: Foot Locker ended Q2 FY16 with cash and cash equivalents of $945 million, long-term debt and obligations under capital leases of $128 million, and shareholders’ equity of $2,578 million.

Capital expenditure: During the quarter under review, Foot Locker incurred capital expenditures of approximately $66 million, and anticipates FY16 capital expenditures at $5 million-$10 million below the original forecast of $297 million.

Inventory: As of July 30th, 2016, Foot Locker’s merchandise inventories grew by 1.7% to $1,339 million versus the year-ago period. On a constant currency basis, inventory increased 1.9% during the reporting quarter.

Share repurchases

During Q2 FY16, Foot Locker repurchased 3.35 million shares worth $188 million and paid dividends of $37 million.

Guidance for Q3 FY16 and full year FY16

Foot Locker reaffirmed its projection of a mid-single-digit increase in comparable sales for FY16. Management continues to expect double-digit growth in EPS for FY16. For Q3 FY16, management expects gross margin to be up marginally and a slight deleverage in SG&A due to the digital business. As a result, EPS is projected to increase either in the double digit or closer. Moreover, Foot Locker is poised for near-term growth since consumers continue to become more health-conscious, driving the need for sports apparel.

Stock Performance

f3Foot Locker’s stock ended the day at $66.91, slipping 1.92%, at the close on Thursday, August 25th, 2016, having vacillated between an intraday high of $68.26 and a low of $66.67 during the session. The stock’s trading volume was at 2,219,038 for the day. The Company’s market cap was at $9.07 billion as of Thursday’s close.

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