Foot Locker's (NYSE:FL) shareholders have more reasons to feel good about their business. The footwear retailer said on Friday that all of the positive trends that lifted its first-quarter results carried through to the second quarter. Strong demand, low inventory levels, and a steady flood of innovative new product launches are combining to create the best selling environment Foot Locker has seen in years.

Management warned investors that the short-term outlook is unusually cloudy, but they also expressed optimism about continued growth in the second half of 2021 .

Let's take a closer look.

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Image source: Getty Images.

Sales trends held up

Three months ago, Foot Locker described a near ideal selling environment, with consumers eager to buy and footwear manufacturers like Nike (NYSE:NKE) releasing dozens of hot new products. This quarter, growth slowed as the company went up against much tougher comparisons with year-ago figures. But growth was still strong.

Comparable store sales rose 7% on top of last year's 28% spike. Foot Locker notched wins across the portfolio, too, including with women's and kids' footwear, apparel and accessories, and running and sports.

"Our strong performance this quarter reflects the health of our category," CEO Richard Johnson said in a press release, "the deep engagement we have with our customers, and the strategic nature of our relationships with our vendor partners."

Paying up for apparel

Foot Locker's profitability is surging thanks to several factors all working in the retailer's favor. Prices are rising thanks to robust consumer demand, which is true across most retailing niches today. But Foot Locker is getting an extra lift from the fact that its inventory level is light and updated with fresh, relevant product launches from partners like Nike.

Inventory was down 10% compared to last year even as sales increased. That success helped push gross profit margin up by a blistering nine percentage points to 35.1% of sales.

Operating income surged despite the fact that Foot Locker is still trimming its store portfolio. The chain closed 57 stores and opened 16 new locations in Q2 for a net loss of 41 stores. The footprint is sitting at 2,911 locations today compared to 3,000 at the start of 2021.

Looking ahead

Management had some encouraging comments about Q3 even after warning investors that this is an uncertain operating environment because of COVID-19 and continued swings in consumer-demand preferences. Yet growth in the second half of the year might approximate what investors saw this past quarter. "We exited the quarter with positive momentum," CFO Andrew Page said, "and are cautiously optimistic about the outlook for the back-half of 2021."

That tone affirmed the bullish expectations that most investors have for Foot Locker stock, which has trounced the market so far this year. That market-thumping performance should continue as long as the retailer gains share in its growing apparel niche, with earnings growth accelerating thanks to rising profit margins.

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