Company Overview: Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates through two segments: Athletic Stores and Direct-to-Customers. The Company is an athletic footwear and apparel retailer, which include businesses, such as include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep and SIX:02. The Direct-to-Customers segment is multi-branded and sells directly to customers through Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the Websites for eastbay.com, final-score.com, eastbayteamsales.com and sp24.com. Additionally, this segment includes the Websites, both desktop and mobile, aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, six02.com kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com and sidestep-shoes.com).


FL Details

Foot Locker, Inc (NYQ: FL) seems to be trading at a low level and is expected to benefit from the tax reform scenario, share buy-back and currency exchanges. The efforts on gradual stabilization of footwear trends, right-sizing of inventory to be complete by mid of 2018 to help recover margin compression, accelerated product deliveries and reduced lead times through vendors, will collectively boost the performance. FL is also intending to roll-out new digital e-commerce platform along with a mobile app platform and new Point of Sale technology. Thus, enhancing digitalization capabilities will help improve sales.
 
Invested in Carbon38: Foot Locker made a strategic investment in Carbon38, taking over a minority stake in the world’s destination for women’s luxury activewear. The group made this move given the brand’s loyal following in the fitness and fashion worlds. The $15 million Series A funding led to the total money raised to $26 million from 2013 by Carbon38. Carbon38 is also expanding their omni-channel strategy, both in the U.S. and internationally, while the recent funding would enhance their new category of luxury active ready-to-wear for women. The group made a franchise agreement with Fox-Wizel Ltd in the first quarter of 2017 for franchised stores operating in Israel. There are 13 franchised stores operating in Israel as of October 28, 2017. On the other hand, in the second quarter of 2017, they terminated their franchise agreement with the third party that operated stores in the Republic of Korea.
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Consolidated Results (Source: Company reports)
 
Improved Direct-to-Customers segment performance: The group’s comparable-sales for the Direct-to-Customers segment surged by 6.1% and 8.1%, respectively, for the thirteen and thirty-nine weeks ended on October 28, 2017, respectively, against the prior corresponding period (pcp). Rise in Eastbay coupled with the ongoing growth of ecommerce sales related with their store-banner websites, drove the performance. The footwear category continued to deliver the strongest gains during the quarter and year-to-date periods. The footwear gains related to their domestic store-banner websites as well as Eastbay for both the quarter and year-to-date periods were boosted by positive results in the children’s and men’s footwear categories. For the quarter, the women’s business softened primarily in the running category. But, the group’s international store-banner websites for both the quarter and year-to-date periods were boosted by sales from men’s and women’s lifestyle running styles. The division profits as a % of sales, fell by 310 basis points and 150 basis points for the thirteen and thirty-nine weeks ended October 28, 2017, respectively, against pcp. The segment’s gross margin rate fell on the back of rise in markdowns in response to promotional activity in the market and, to a lesser degree, higher shipping and handling expense.
 

Direct to customers’ performance (Source: Company reports)
 
To gear-up on weak bottom line: Foot Locker reported a weak bottom line with net income falling to $102 million, or $0.81 per share for the third quarter of 2017 against the net income of $157 million, or $1.17 per share in pcp. This weakness is on the back of top line pressure wherein the third quarter comparable-store sales lost 3.7%. The group’s overall sales fell 0.8%, to $1,870 million during the quarter, against the sales of $1,886 million for the corresponding prior-year period. As a result, the gross margin rate also lost to 31% of sales as compared to 33.9% in the year ago period. For the first nine months of 2017, the group’s Net income fell to $333 million, or $2.55 per share on a GAAP basis, against the net income of $475 million, or $3.50 per share, for the same period in 2016. The year-to-date sales fell by 1.4% to $5,572 million, against the sales of $5,653 million in the corresponding nine-month period of 2016. The earnings per share for the nine-month period reached $2.84, which is an 18% fall on a non-GAAP basis, against the same period in 2016.
 
Improving apparel sales despite weak footwear performance: Athletic Stores segment sales without FX impact lost by 3.6% and 2.8%, respectively for the thirteen and thirty-nine weeks ended on October 28, 2017, against pcp. On the other hand, the Foot Locker Canada delivered positive comparable-store sales during the quarter while Footaction performance was positive for the third quarter. But Athletic stores segment’s footwear sales performance was weak across men’s, women’s, and children’s segments, whereas the year-to-date decline was related primarily to declines in children’ and men’s footwear. Most of the store banners were not able to offset the comparable-store declines in basketball and court lifestyle footwear. The fall in most of the other footwear categories for both the quarter and year-to-date periods was on the back of insufficient product availability of certain styles and the lack of product innovation in certain categories that match the customers’ quickly-changing style preferences. Women’s court styles became the major reason that led to the comparable-store sales decline in women’s footwear both domestically and internationally during the third quarter. The decline in women’s footwear was most significant in Foot Locker, Lady Foot Locker, and Foot Locker Europe. The decline in footwear sales was partially offset by gains in apparel sales, as the majority of store banners experienced apparel sales gains for both the thirteen and thirty-nine weeks ended October 28, 2017. Further, men’s branded apparel and outerwear, as well as women’s apparel for the group’s SIX:02 banner performed well. Even Children’s apparel witnessed a comparable-store sales increases against the pcp.
 
Promising Outlook: The weak top and bottom line performance in the third quarter was in line with the group’s expectations. The group now expects itself to be well positioned to target the growing demand for premium product which has been gradually improving against the first half of the year. The group forecasts that they can modestly exceed, the top- and bottom-line guidance given in August 2017 for the fourth quarter of 2017. Moreover, their efforts on cuts as well as reorganization of their corporate and division staff during the third quarter of 2017 were important to sustain themselves in the rapidly changing retail industry dynamics. The group’s new initiatives include making critical investments in their platforms and supply chain, to ensure that that they are well positioned to benefit from the sneaker culture and, more broadly, youth culture. Foot Locker opened 12 new stores, remodeled or relocated 41 stores, and closed 22 stores during the third quarter of 2017. As of October 28, 2017, they operated 3,349 stores in 24 countries (in North America, Europe, Australia, and New Zealand). Moreover, 83 franchised Foot Locker stores were operating in the Middle East, as well as 14 franchised Runners Point stores in Germany.
 
Selling and gross square footage (Source: Company reports)
 
Balance sheet highlights and buy-backs: The group’s merchandise inventories fell by 3.4% to $1,315 million as of October 2017 against the third quarter of pcp. The inventories fell 4.9% in constant currencies. Foot Locker had a cash of $890 million as of the quarter end, while the debt on its balance sheet reached $126 million. The Company spent $304 million to buy 8.69 million shares during the quarter. They paid dividends of $120 million and $111 million, respectively during the first three quarters of 2017 and 2016. This represented quarterly rates of $0.31 and $0.275 per share for 2017 and 2016, respectively. Moreover, the group got proceeds from the issuance of common stock in connection with employee stock programs of $17 million and $28 million for the thirty-nine weeks ended October 28, 2017 and October 29, 2016, respectively.
 
Stock performance: The shares of Foot Locker made a rally of about 64% in the last three months with a fall of over 24% in one year (as of January 24, 2018) and are still inexpensive. Management has been taking steps to form a more flexible and efficient organization. They made a solid management of inventory in the third quarter, for improving merchandise assortments into the business for the holiday season. The holiday sales growth has been better than expected, which would drive the group’s upcoming fourth quarter performance. Foot Locker thus seems to be an appealing investment opportunity while the group is set to release their earnings update on February 22, 2018. The return on equity over the last five years has been on the uptrend, well above the industry median. We recommend a “Buy” on the stock at the current price of $52.25


 FL Daily Chart (Source: Thomson Reuters)

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