By Carter Harrison
Foot Locker has kicked off its fiscal year with a somber set of numbers. Sales wise the group remains in growth — but only just, with both total and comparable increases coming in well short of previous quarters. Net income dipped slightly, mostly due to higher expenses against the backdrop of more sluggish sales growth.
Newer stores, especially those that integrate premium concepts like the House of Hoops department and Puma Labs section, are engaging and help to increase average transaction values as they encourage shoppers to trade up.
Foot Locker has blamed some of the slowdown on delayed IRS tax refunds, which it says affected sales early in the quarter. The refund issue is often bandied about as an excuse for underperformance. However, in Foot Locker’s case, we believe the point is a valid one as many younger consumers use part of their windfalls to buy expensive sneakers; and many parents do the same for their kids.
Although delayed refunds affected the first part of the trading period, it is more worrying that sales did not pick-up towards the back end of the quarter. Admittedly some of the fillip provided by refunds may well be pushed into the next period, but we believe current performance has also been tempered by a lower level of demand within the sporting goods category.
Very tight inventory management, which Foot Locker put in place some time ago, has been a saving grace as it meant excessive discounting was not necessary to clear down stock over the first quarter. Without this, net income deterioration would have been significantly higher.
The question now is where does Foot Locker go from here? On the demand front, there is good news: we see a sustainable recovery in overall demand for sporting goods, including sneakers, over the remainder of this year. This alone should provide some buoyancy to Foot Locker’s numbers.
Within the market, we believe that Foot Locker is well positioned to grow sales, even as more players crowd into its sector. The key to this success is the company’s drive to ensure it remains a key destination for sporting, and sneaker, enthusiasts.
This push can be seen in the ongoing store relocations and remodels. Newer stores, especially those that integrate premium concepts like the House of Hoops department and Puma Labs section, are engaging and help to increase average transaction values as they encourage shoppers to trade up. They are also important in allowing Foot Locker to hold its own in the more serious and semi-professional segment of the market, where the growth of players like Under Armour threatens market share.
Last year’s openings of the flagships on New York’s 34th Street and in Times Square were both well received by customers. In our view, these stores are not only sales channels but marketing vehicles which help push Foot Locker’s credentials in sports and footwear. We are encouraged that further destination flagships in cities like Chicago, Los Angeles, Toronto, and Melbourne will follow.
Digital is also an area of strength for the company, especially when allied with its physical footprint. With many shoppers still valuing being able to try on footwear before they buy, this is an area where Foot Locker has a strategic advantage in that it is able to create a compelling omnichannel proposition using both its stores and websites.
Despite its good position, Foot Locker has more work to do to catch up after the slower first quarter. On the profit side, we believe this can be achieved by further savings and efficiencies — an area where the company has a good record of delivering. We are, however, more cautious on the sales front.
Carter Harrison is an analyst at GlobalData Retail.