Faced with persistent store traffic and conversion challenges, a promotional landscape, and an 11 percent year-over-year increase in inventories, Foot Locker has lowered its financial outlook for the remainder of the FY and paused its dividend for shareholders as it works to get better positioned for the upcoming holiday season and FY24.
In Q2, Foot Locker reported an operating profit of $1 million against a profit of $142 million for the period ended July 29, as total revenues declined by 9.9 percent to $1,861 million from $2,065 million. Ongoing consumer softness, a changing vendor mix, and a repositioning of its Champs Sports business contributed to a 9.4 percent drop in comparable-store sales. EMEA constant currency sales slipped by 3 percent to $429 million, and North American sales fell by 13.1 percent to $1,288. Period sales in Asia Pacific contracted by 1.4 percent to $145 million. Higher markdowns and shrinkage coupled with occupancy costs contributed to a 460-basis point decline in quarterly gross margin to 27.1 percent. Merchandise margins fell by 300 basis points, driven by higher promotions to move inventory and shrink levels were elevated during the period. Footwear comps fell by high single digits; apparel comps slipped mid-teens; and accessories comps slipped by low double digits.
EMEA comparable store sales fell by 2.3 percent in Q2, with Foot Locker Europe down by 1.1 percent and the exited Sidestep format off by 35 percent. With the region’s challenging macroeconomic environment, the retailer is emphasizing conversion, inventory liquidation and re-igniting the Foot Locker brand in key markets. The group was encouraged by a recent Nike Tuned Air launch in France that expanded to the remainder of continental Europe with solid sell-throughs and “tremendous buzz.”
Numerous factors contributed to the poor quarterly results, which were “broadly in line” with the retailer’s expectations. While Foot Locker remains committed to its “Lace Up” strategic plan that was introduced in March, softening sales trends in July forced it to drop its financial outlook for the current fiscal year. Capital is being invested in technologies and capabilities, and key vendor partnerships are being fine-tuned with additional focus on merchandising, marketing, and omnichannel. August comparable sales were trending down “high single digits,” slightly better than in July.
On the brand front, Foot Locker says it remains committed to increasing its merchandising mix to 40 percent non-Nike products by 2026. In Q2, non-Swoosh merchandise rose to 36 percent of total goods from 31 percent in the year-ago period. Beyond Nike and Jordan basketball and the brand’s Tech Fleece program, the group, which has a host of new senior executives under CEO Mary Dillon, is seeing outperformance from Puma, Crocs, Asics, and Brooks. Meanwhile, Foot Locker is “leaning into” its partnership with New Balance, its fourth-largest brand that grew more than 100 percent in Q2. Foot Locker pointed to the brand’s innovation, storytelling, and in-store presentation as the key levers for driving its increased market share. The retailer is also excited about expanding the distribution for On and Hoka in performance running. On is moving to 350 doors by year-end, up from 280 currently, and Hoka will be in 150 locations by year-end versus 100 currently.
The retailer, saddled with $1.8 billion in inventory at Q2 end, up 11 percent year-over-year, intends to take more aggressive markdowns for the remainder of 2023. It is now forecasting an 8.0 to 9.0 percent decline in annual sales, a 9.0 to 10.0 percent drop in comparable sales and additional gross margin contraction due to the planned promotional sell-off. Foot Locker will take more aggressive promotional action to drive demand and manage inventory as it aims to be better positioned for 2024.
Despite its downsized expectations for H2, Foot Locker is optimistic about numerous market trends and innovations this autumn and the upcoming holiday season. Among them: Rihanna’s collaboration with Puma, Anthony Edwards’ new signature basketball shoe for Adidas and an increased supply of Sambas, Gazelles and Campus styles from the latter brand.
Meanwhile, the senior executive suite at Foot Locker has a handful of new additions. Among them: John Sacova, VP of Marketing for Europe; Matthew Wright, VP, and Global Creative Director; Kim Waldmann, Chief Customer Officer; Andrew Rahosh, VP of Global Ecommerce; and Brian Milburn, SVP, and Chief Merchandising Officer.
