Foot Locker’s share price fell by $12.30, or 29.7 percent, on Friday after the retailer told investors that its allocation of key Nike products would decline this year to no more than 55 percent of its overall merchandise assortment by the fourth quarter, adding that its 2022 outlook will fall below expectations. Some reports suggest that Nike is deliberately slashing orders to its biggest longtime, global wholesale partner as sales within its own direct-to-consumer channels continue to grow significantly.
Nike will account for about 60 percent of Foot Locker’s overall assortment during the present financial year, down from 70 percent in 2021 and 75 percent in 2020. But the changing dynamic between the Swoosh and the international retail behemoth should create more opportunities for other brands inside Foot Locker, including Adidas, Puma, New Balance, Reebok and Timberland, and new ones being tested such as On.
“We know that our consumer demands choice across a variety of brands and categories,” Foot Locker’s chairman and CEO, Richard Johnson, told investors. “So, we continue to work to broaden our selection, including leaning into brands where we are underpenetrated, putting a bigger focus on apparel and introducing new third-party brands as well as our own private labels.”
In the fourth quarter ended Jan. 29, the company’s operating income fell by 26.7 percent to $118 million from $161 million despite a 6.9 percent increase in total revenues to $2,341 million, or a growth of 8.2 percent in local currencies. Comparable store sales inched up 0.8 percent as apparel/accessories comps gained 30 percent and comparable sales of non-Swoosh products rose by more than 30 percent. The WSS and Atmos chains, which were acquired late last year, contributed revenues of $139 million and $49 million, respectively, for the period. The share of e-commerce declined to 21.6 percent of total sales from 27.4 percent.
Geographically, EMEA sales rose at a strong rate of 18.6 percent in the quarter, with Foot Locker Europe up in the high teens and Sidestep rising by about 70 percent year-over-year. The retailer continued introducing its FLX reward program across the region, adding Germany, Italy, and Spain in the fourth quarter with plans for five more countries in 2022. Also, Foot Locker introduced a new e-commerce platform in Europe. U.S. revenues dropped by 4.5 percent on a comparable store basis, while Asia-Pacific jumped by more than 20 percent.
For the full financial year, Foot Locker’s operating income came in at $860 million, up from $303 million in 2020, on an 18.7 percent topline growth to $8,958 million, with a 15.4 percent jump in same-store sales. The gross margin slipped by just 0.1 percentage points to 33.0 percent. The annual net income of $892 million was up sharply from $323 million in the prior year. On an adjusted basis, it showed an improvement to $807 million from $296 million on a non-GAAP basis.
The current outlook for the current fiscal year calls for an indicative adjusted non-GAAP net profit of around $445 million, based on the company’s forecast earnings per share of $4.25-$4.60. Despite the addition of WWS and Atmos, total revenues should be down by between 4 and 6 percent in absolute terms and by 8-10 percent on a same-store basis. The gross margin is expected to drop to between 30.1 and 30.3 percent, as the retailer does not expect last year’s favorable promotional environment and historically low markdown rates to continue. The management promised that operating expenses would moderate.
Elsewhere on the real estate front, the overall store count is forecast to shrink by around 3 percent this year, with the total square footage down by less than 2 percent. While 190 doors will be shuttered, some 100 will be opened. The planned mix includes 40 “Community” and “Power” stores, 27 WSS locations and 9 Atmos doors. Additionally, Foot Locker has taken action to reduce its overall North American lease life on stores to about three years, down from four years in 2018, in a move aimed at more real estate flexibility.
In the past year, the total number of stores within the group shrank to 2,858 from 2,998 a year earlier, despite the addition of 93 WSS stores in September and 38 Atmos stores in November, as the company folded its former Footaction chain in the U.S. Foot Locker Europe grew by two units to 626 and Sidestep by ten units to 98.
Indicating that the change in its business relationship with Nike had been in the works for a while but was cemented late last month during regular planning meetings with the company, Johnson stated:
“Our consumers are clearly saying that they want choice and that multi-brand destinations matter, …and when 70-plus percent of your purchases are with one vendor, it doesn’t leave a lot of space in your store for choice. So, that’s part of what we’re looking at. Really, it’s an acceleration of a conversation that’s been going on for a couple of years…”
Foot Locker is embarking on a brand diversification strategy that will include global programs from Adidas (Stripe Life and Trefoil State of Mind), New Balance (574 Life Concept) and third-party partnerships with other brands such as Puma and Crocs. A few days ago, we already reported a new deal with Authentic Brands Group that will enhance Reebok’s presence in the group’s U.S. stores.
Meanwhile, strong same-store sales growth and new openings are forecast to propel WSS to $1 billion in annual sales by 2024. The Japan-based Atmos chain is expected to increase its top line by nearly 50 percent to almost $300 million over the next three years by scaling operations in existing markets and expanding internationally.
