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Foot Locker Breaks Down Its Strong Third Quarter

By Demitri Kalogeropoulos - Nov 29, 2019 at 10:57AM

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Here are some highlights from management's earnings call with investors.

Foot Locker ( FL 1.02% ) recently treated investors to some good news about its operating trends. The footwear and apparel specialist's growth rebounded sharply in the fiscal third quarter, and its profitability also increased. These factors combined to push its adjusted earnings per share higher by nearly 20%.

That news wasn't all good, though. CEO Richard Johnson and his executive team broke down the wins and losses from the period in their conference call with analysts, during which they also detailed why they slightly lowered their sales outlook for the full year. Below are a few highlights from that presentation.

A jogger laces up his shoes.

Image source: Getty Images.

Good growth with a few drawbacks

"Our strong top and bottom-line performance reflects some of the early benefits of implementing our long-term strategic imperatives. Elevating the customer experience, investing for long-term growth, driving productivity and leveraging the power of our people." – Johnson

Foot Locker's faster sales gains -- comparable-store sales growth accelerated to 5.7% from 1% in the second quarter -- were driven by some important wins during the back-to-school selling season. Executives highlighted the chain's success in the footwear niche, booming e-commerce demand, and positive performances in key markets such as Canada and Australia.

Detracting from those successes was a big slump in the apparel segment. The company also continued to suffer from a decline in foot traffic, though it offset that with higher average spending per customer. Yet overall, it was a positive quarter, especially given that the comparisons were being made to a year-ago quarter during which Foot Locker delivered strong growth.

Inventory updates

"An important contributor to the strong performance this quarter was the continued productivity of our inventory. Our turns continued to improve overall, and our inventory remains both fresh and productive heading into the holiday season." – CFO Lauren Peters

Foot Locker benefited from a steady stream of popular product releases from key suppliers such as Nike and Adidas ( ADDYY 1.61% ). These launches combined with an already-efficient supply chain to keep inventory flat despite the more than 5% sales increase. The consumer discretionary retailer believes these trends have set it up for a strong fourth quarter, particularly in the core footwear segment. "We have an exciting lineup for this holiday season," Johnson said.

Reducing the outlook due to apparel

"Our outlook is [for] comp sales [to be] relatively flat, which reflects the trends in our apparel business as well as the challenging comparison to last year's 9.7% fourth-quarter [growth]." -- Peters

Foot Locker reduced its annual guidance in a few key metrics, mainly because the apparel weaknesses are projected to impact results at least for the next few quarters. Specifically, comps are forecast to be flat over the holidays as gross profit margin ticks down. That prediction translates into a forecast for low-single-digit comps for the year, which is down from the mid-single-digit guidance that management issued back in late August.

Executives also announced that they will cease to issue quarterly sales guidance, and instead will follow the more common industry practice of providing an annual outlook that they adjust each quarter, as appropriate. As a result, investors will hear Foot Locker's expectations for 2020, and get its detailed rundown about how well the holiday season went, when the chain announces its fourth-quarter results sometime in early February.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Foot Locker, Inc. Stock Quote
Foot Locker, Inc.
FL
$44.41 (1.02%) $0.45
adidas AG Stock Quote
adidas AG
ADDYY
$144.00 (1.61%) $2.28

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