Foot Locker (FL 0.23%) is working on a turnaround plan to improve its business. Called "Lace Up," it has reasonable goals, including an expanded and better relationship with customers, better financial performance, and improved integration between physical and digital platforms. One of the key ways the company plans to achieve these goals is through a drastic repositioning of its stores. There are risks to consider, however, along with the hoped-for rebound in performance.
Off on the wrong foot
Before getting into the turnaround effort, which is still in its early days, investors need to understand the difficult backdrop that Foot Locker is facing right now. In the first quarter of 2023, the retailer's sales declined 11.4%. The company operated 2,815 stores and franchised 148 stores (in the Middle East and Asia) in the first quarter of 2022, but had just 2,692 stores with 163 franchise locations in the same quarter of 2023, so the drop in sales makes some sense.
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The bigger problem is same-store sales, which refers to stores that have been in operation for at least a year. This figure gives an idea of the company's ongoing performance by taking out the noise that can arise from store openings and closings. Foot Locker's same-store sales in the first quarter fell 9.1%. That's pretty troubling, hinting that the company isn't executing that well right now. It would be one thing if the company had faced a tough comparison period, with same-store sales strong in the first quarter of 2022. That wasn't the case, though -- same-store sales dropped 1.9% a year ago. It certainly seems store-level performance is getting worse, not better.
The company is in the early stages of the Lace Up turnaround plan, so it is too soon to rush to conclusions. However, it is very clear that the retailer needs to do something with its store footprint.
Getting out and growing bigger
One of the major goals of the Lace Up plan is to reduce the company's exposure to malls. In North America, "off mall" stores accounted for around 35% of Foot Locker's store footprint in the first quarter of 2023. That is up from 31% in the same quarter last year. The ultimate goal is to get that figure up to 50% by 2026. That's a lot of change still to come, and change increases execution risk. Finding desirable locations, building out stores, and then establishing them are all simple things to discuss, but they can be hard to do in real life.
At the same time, Foot Locker is making changes to the stores themselves. For example, it is working to differentiate its Champs nameplate so it stands out from the company's Foot Locker stores. Same-store sales at Champs locations fell 24.6% in the first quarter of 2023, which is a particularly troubling number. Investors need to watch to ensure that this is a drop related to the format transition and not a sign that Champs is in serious decline.
Meanwhile, the company is also opening more community and power stores. Basically, these are larger off-mall locations that currently represent 12% of the store footprint. The goal is to get that figure to 20% by 2026. Bigger stores are likely to help the company reduce costs. Rent, for example, would likely drop as a percentage of overall square footage. But if a larger store doesn't live up to expectations, the financial hit will be bigger than it would be with a smaller store. Location and store-level execution become even more important for larger-format stores.
Then there's the company's effort to sell more private-label apparel. Such sales increased to 11% of apparel sales in the first quarter of 2023, up from 7%. That's good news, given that private-label brands tend to have higher profit margins for retailers. However, there's a downside to this exposure as well, as Foot Locker's apparel is at least partly driven by fashion trends. Call a trend wrong, and increased private-label exposure could turn into a serious headwind.
No easy solution
None of this is to suggest that Foot Locker's Lace Up plan is destined to fail. In fact, it could turn out to be a smashing success that's just going through some growing pains as it gets underway. Still, the company's early turnaround effort is not going well, and that can't be ignored. And solid execution is going to be increasingly important as the company moves more stores, opens larger locations, shifts the dynamics of key nameplates, and starts selling more of its own apparel. Investors interested in Foot Locker should be paying close attention to management's success on each of these fronts when assessing the company's overall performance.
