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How Foot Locker Overcame Falling Customer Traffic Over the Holidays

By Demitri Kalogeropoulos – Updated Apr 11, 2019 at 1:25PM

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Highlights from the retailer's strong fourth-quarter finish.

Foot Locker (FL -0.32%) saved the best for last. After posting modestly improving growth results through most of 2018, the footwear retailer announced last week that sales gains shot up to a double-digit pace in the key holiday quarter. The company achieved higher profitability, too.

Those results put Foot Locker in a good position for the 2019 fiscal year, but management faces some issues as sales continue to shift toward online channels. CEO Richard Johnson and his team talked about their plans to meet these challenges in a conference call with investors. Let's look at a few highlights from that call.

Shoes lined up on a table in a store.

Image source: Getty Images.

Getting back to records

With a comparable sales increase of 2.7% for fiscal 2018, total revenues reached $7.9 billion, a new record in our history of Foot Locker. And we were able to achieve non-GAAP earnings of $4.71 per share, an increase of 18% over the 52-week equivalent in 2017.
-- CEO Johnson

Foot Locker's strong holiday quarter included a 9.7% increase in sales at existing locations, which marked a sharp acceleration from the prior-quarter's 3% uptick. Gross profit margin expanded by almost 2 full percentage points, to 32.4% of sales, thanks mainly to a flood of new innovative product releases from suppliers including Nike.

Customer traffic fell, but the company more than offset that slump with higher digital sales and much higher average prices. E-commerce sales are supported by the shift in consumer demand toward that channel, while pricing should stay strong so long as Foot Locker sells a high proportion of fresh products.

As a result of these wins, the chain returned to sales growth following 2017's decline. Its bottom-line adjusted profit margin took a small step back toward long-term targets, too, improving to 6.9% of sales from 6.6%.

Check out the latest earnings call transcript for Foot Locker.

All about inventory

We finished with an inventory turnover above our long-term goal of more than three times. This is a meaningful accomplishment we have been working on for some time, and a testament to our continuing focus on driving further productivity gains.
-- CEO Johnson

Executives credited "product heat" for driving much of the head-turning sales gains around the holidays. And by that they mean the stepped-up pace of footwear introductions.

Yet Foot Locker laid the groundwork for this sell-through by reducing inventory levels over the past year so that its buyers could focus on selling only the hottest, most recent launches from Nike and other suppliers. Success here allowed the chain to cycle through its inventory four times over the year, to outpace its long-term goal by an entire turn. Inventory ended up just 1% over the fourth quarter, too, to trail the 9% sales increase.

Looking ahead

For 2019, we believe we can achieve a mid-single digit comparable sales gain and a double-digit percentage earnings per share increase.
-- CFO Lauren Peters

Foot Locker's projection for healthy sales and earnings growth in 2019 shows that the chain has put its brutal 2017 results behind it. Revenue and profitability are expected to continue their positive momentum this year, supported by trends like improved inventory and booming digital sales.

The retailer plans to reduce its selling footprint in the U.S. market, though, and that shift suggests management isn't optimistic that customer traffic trends will bounce right back into positive territory. Foot Locker also expects to spend aggressively on the digital sales channel that now accounts for about 19% of its business, up from 16% a year ago.

The good news for investors is that management believes the company's multi-channel setup strikes the right balance for long-term returns. "It's a real marriage of the digital and physical that's making the difference," Johnson said.

Demitrios Kalogeropoulos owns shares of Nike. The Motley Fool recommends Nike. The Motley Fool has a disclosure policy.

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