Three things are sure to bring Gen Xers flocking to a retail space: exclusive brands, digital in-store shopping, and a high-tech environment designed by local artists and influencers. Foot Locker (NYSE:FL) has found a way to package all three and put a bow around it.

Foot Locker's New York experiment

In early August, Foot Locker announced the grand opening of its Washington Heights community-based Power Store in New York. The 9,000-square-foot store is the first among Foot Locker stores to showcase the Nike App at Retail digital technology. Here, shoppers can peruse their favorite brands such as Nike, Vans, Puma, Champion, and Timberland with a mobile device in hand and a Nike app that delivers all they need to know to get exactly what they want when they want it.

A woman in athletic gear takes off running.

Foot Locker's making strides. Image source: Getty Images.

The Nike App at Retail is the ultimate shopping companion, providing personalized content and exclusive access to products. Shoppers can use their devices and the app to scan to see if an item is in stock, or they can reserve it for pick-up in-store.

The NikePlus Unlock Box in the app works like a vending machine through which users can unlock free limited-edition items, while the "Shoecase" capability gives app users early access to coveted sneaker releases.

Exclusive access to brands

Aside from the obvious collaboration with Nike, the store is also doubling down on brand exclusivity by offering curated local brands that can only be had at the Washington Heights location. As part of its Home Grown initiative, Foot Locker partnered with Perico Limited, Lyfestyle NYC, and Triangulo Swag. Getting your hands on something that none of your friends can appeals to many shoppers.

It takes a village

What Footlocker has done very cleverly is to blend three winning marketing strategies: exclusive brands, digital technology, and the local community. By showcasing local designers, artists, and influencers, Foot Locker is currying favor locally and encouraging customers to visit its brick-and-mortar locations. Only those who visit Foot Locker Power Stores gain access to featured exclusive local brands and can use the Nike digital app to optimize their shopping experience.

The whole shebang is a mutual boon for Foot Locker, its brands, and local purveyors, who now have a popular channel through which to market their products. Currently, Foot Locker is operating Power Stores in Detroit, Philadelphia, London, Liverpool, and Hong Kong and plans to open more than a dozen new ones in 2019. Upcoming stores are planned for Los Angeles and Vancouver, Canada.

Foot Locker's financials

The theory is great, but can the financials sustain the heavy investment? Second-quarter earnings for Footlocker were disappointing, and the share price dropped following the announcement. Net income for the second quarter of 2019 was $60 million, or $0.55 per share, compared to net income of $88 million, or $0.75 per share, for the same quarter one year ago. Comparable-store sales increased by only 0.8%. Total second-quarter sales decreased 0.4%, to $1.77 billion, compared to sales of $1.78 billion for the corresponding prior-year period.

The company's gross margin rate decreased to 30.1% from 30.2% a year ago, and selling, general, and administrative expenses increased to 22.2% from 21.3%. However, this is explained by investments in digital capabilities and infrastructure, all of which are central to the company's strategy.

Importantly, the company is reducing its inventory and can easily manage its debt obligations. As of Aug. 3, 2019, the inventories were $1.23 billion, 2.2% lower than at the end of the second quarter last year. The company's cash totaled $939 million, while the debt on its balance sheet was $123 million.

Finally, Foot Locker seems confident that its stock is currently undervalued based on a repurchase of 2.9 million shares for $120 million during the quarter.

Footlocker's recipe, at least theoretically, seems to be a winning one.