Release Date: August 28, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Foot Locker Inc (FL, Financial) returned to positive total and comp sales growth in Q2 2024, with comps increasing by 2.6%, led by Foot Locker and Kids Foot Locker banners.
- Gross margin expanded by 50 basis points year-over-year, driven by improved merchandise margins and occupancy leverage.
- The company saw stabilization in the Champs Sports banner, with meaningful comp improvement quarter-over-quarter.
- Foot Locker Inc (FL) is making significant progress with its Lace Up Plan, including strategic investments in store experience, digital, loyalty, and brand building.
- The company is reiterating its full-year outlook, expecting comp growth and EBIT margin expansion, and maintaining its guidance of non-GAAP EPS of $1.50 to $1.70.
Negative Points
- Non-GAAP earnings per share was a loss of $0.05, including a $0.09 impact from a non-recurring FLX charge.
- Foot Locker Inc (FL) is winding down operations in South Korea and closing stores in Denmark, Norway, and Sweden, indicating challenges in these markets.
- The company is reducing capital for new store openings at WSS due to ongoing inflationary pressures impacting discretionary spending.
- Comps in the apparel business were down mid-teens, reflecting a challenging promotional environment.
- The company expects gross margin expansion to be slightly lower than previously anticipated due to promotional pressures in international banners and WSS.
Q & A Highlights
Q: The environment remains tough, but Foot Locker is accelerating comps and pulling back on promotions. Can you elaborate on what's driving this? Any changes in your consumer base, particularly with lower-income consumers at WSS?
A: Mary Dillon, CEO: We're pleased to return to positive comps and gross margin expansion while pulling back on promotions. This improvement is broad-based across all income cohorts, regions, and formats. Our execution is meeting customer needs, and our Lace Up Plan is working. Our young, diverse customer base prioritizes our category despite discretionary spending pressures. WSS customers, particularly in California, face more pressure due to multiple household members and stretched discretionary dollars.
Q: On the guidance, you mentioned SG&A up low double digits in Q3. Is there anything shifting from Q2 or out of Q4?
A: Michael Baughn, CFO: The increase in Q3 SG&A is due to timing of technology project expenses. We expect Q3 to be the peak for SG&A growth, with improvements in Q4 as we lap last year's brand-building activities.
Q: Can you explain the decisions behind closing operations in South Korea and the Nordics, and converting Greece and Romania?
A: Mary Dillon, CEO: We evaluate our business to simplify and optimize operations. Decisions are based on market size, growth potential, profitability, and return on capital. South Korea has growth potential but profitability challenges, while the Nordics have lower growth potential. Southeast Europe shows potential and will benefit from a partner's capital and execution efficiency.
Q: On gross margin guidance, you mentioned headwinds in WSS and international. Are Foot Locker US margins tracking as planned?
A: Michael Baughn, CFO: We feel good about North American margins. The adjustments are due to additional markdowns needed in international and WSS. Europe remains promotional, especially in apparel, and WSS faces consumer pressure. Our inventory levels are well-controlled, which supports our margin expansion.
Q: Can you discuss the move to St. Petersburg, Florida, and its impact on human resources? What remains in New York?
A: Mary Dillon, CEO: We already have a significant presence in St. Petersburg and will expand it. We'll maintain a limited presence in New York to stay connected to sneaker culture and fashion. This move enhances collaboration and offers financial benefits. We're not requiring relocations and will attract and retain talent.
Q: How are promotions trending in the Americas business? What role does Nike play in Q3 and Q4 sales plans?
A: Mary Dillon, CEO: We've been pulling back on promotions, particularly in North America, and our comps and AUR improvements reflect this. Our initiatives are driving growth, and we expect continued strength into the second half. Our partnership with Nike is strong, focusing on basketball, kids, and sneaker culture. We expect to return to growth with Nike in Q4.
Q: Are there any issues with deliveries or disruptions affecting gross margin? What is the opportunity from the headquarters move and international transitions?
A: Franklin Bracken, CCO: We saw some disruption from Red Sea shipments but are managing it closely. Michael Baughn, CFO: The headquarters move and international changes will contribute over 20 basis points to EBIT margin by 2027, with potential additional upside from royalty revenues.
Q: There's a significant ramp expected in Q4 to meet annual guidance. What drives this confidence? How will the loyalty program penetration ramp?
A: Mary Dillon, CEO: The loyalty program is resonating well, with penetration already up to 24%. We expect it to continue ramping towards our 50% target. Michael Baughn, CFO: The Q4 ramp is driven by increased promotional activity, loyalty program scaling, store refreshes, app launch, and returning to growth with Nike.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
