Foot Locker, after reporting a 73 percent drop in Q1 operating income to $61 million and an 11.4 percent decline in total sales to $1,927 million for the period ended April 29, dialed back its FY23 outlook for revenues, comp sales and gross margin for the 12 months. The news hurt Foot Locker’s stock price on Friday, sending it down more than 27 percent, or $11.31, for the day, and created a negative “halo” effect on the daily share price of four major athletic footwear brands—Nike, Adidas, Puma, and Under Armour—that each fell more than 3 percent on May 19.
The group’s new President and CEO, Mary Dillon, while citing the retailer’s need to become more aggressive with product price markdowns to drive demand and manage merchandise inventories that were up 25.5 percent to $1,758 million year-over-year, reiterated that Foot Locker’s new “Lace Up Strategy,” unveiled in March, will enable the company to return to sustainable growth after the current fiscal year.
“While near-term trends are not meeting our expectations, we are firmly committed to our Lace Up Strategy and the long-term plans across our banners and regions,” Dillon told analysts, later adding, “While 2023 was always going to be a reset year for us, we now expect a sharper decline in both sales and earnings this year due to steeper macro headwinds combined with other dynamics of our transition […].”
Q1 results and review
Net income declined by 73 percent to $36 million from $132 million, and Ebit was down by 70 percent to $57 million as the retailer realized total revenues below expectations due to weak sell-throughs of non-launch products, a 400-basis-point erosion in gross margin to 30.0 percent, and a 250-basis-point decline in merchandise margins due to higher promotional activity. Softer sales trends commenced in April, leading to a 9.1 percent decline in comp sales for the period.
Footwear sales comped down high-single digits, with lifestyle running as the most disappointing segment, fueled by consumer resistance to returning to full-price purchases of $120 to $200 after a period of promotional selling in Q4. New Balance was Foot Locker’s best-performing brand in Q1, with sales rising by nearly 100 percent year-over-year due to demand for key styles, including the 9060 and 530. Signature basketball and performance running, aided by substantial sales growth from On, Hoka, Brooks, and Asics, had positive sales momentum. Meanwhile, soccer-inspired looks, such as the Samba and Gazelle from Adidas, are projected to be key trends for the retailer’s back-to-school and holiday seasons.
Apparel and accessories sales fell by mid-teens in Q1, although sales of private label brands increased by 13 percent, driven by the new Locker and Cozy labels. Foot Locker is eyeing woven bottoms and new technical, outdoor-inspired collections as growth opportunities going forward.
Europe and Asia-Pacific
Comps were relatively flat in Q1, with Foot Locker Europe up low-single digits and Sidestep sales down by nearly 40 percent as liquidation of the business continued. Overall performance across the region was below expectations, but there was solid growth in Italy, Spain, and France as tourism and larger cities drove growth. Sales fell in the U.K. and Germany.
Asia-Pacific comps increased by 8.9 percent, helped by an 11.2 percent comp gain by the Foot Locker banner fueled by brand diversification efforts and a return to tourism across the geography. Foot Locker is moving forward with its strategy to shutter stores in Macau and Hong Kong and convert operations in Malaysia and Singapore to a licensed business model. Atmos comps increased by 2.7 percent, helped by a tourism rebound in Japan and a series of key sneaker drops.
FY23 and Q2 Outlooks
Soft sales trends that commenced in April and continued into May prompted the group to adjust its full-year outlook for sales and gross margin downward. Annual revenues are now forecast to fall by 6.5 to 8.0 percent, higher than a 3.5 to 5.5 percent drop predicted earlier, and more aggressive markdowns, and a higher shrink rate will contribute to an expected FY23 gross margin range of 28.6 to 28.8 percent versus 30.8 to 31.0 percent previously. In H2, comps are forecast to decline by mid- to high-single digits due to continued consumer softness, although there will be some sequential improvement from H1.
While Foot Locker intends to continue moving forward with its targets of generating 25 percent of its overall business from digital and obtaining 50 percent loyalty penetration, the retailer will now need more time to reach “mid-term targets” of total revenues of $9.5 billion and an Ebit margin range of 8.5 to 9.0 percent that were initially planned for 2026. A plan to assemble 40 percent or more of its vendor mix from brands other than Nike by 2026 remains intact, but there is also an objective to begin growing its Nike sales again in 2024.
Brand development and new formats
Foot Locker, which continues to realize strong growth from New Balance, Puma and Asics and outperformance from the Adidas brand, raised the percentage of its non-Nike brand mix to 35 percent in Q1 from 33 percent a year ago. Exclusive products represented 15 percent of period revenues, flat year-over-year, and there is an objective to raise that percentage to 25 percent by 2026.
The Hey Dude brand is increasingly being adopted by suburban young males in the U.S. and is being added to 450 North American doors. Kids Foot Locker is adding New Balance and Hey Dude in Q2 and On at back-to-school.
Under Armor and New Balance have been added to the assortment at Champs, where the group wants to position the banner against the active athlete. The chain has also begun leaning into athleisure trends, technical performance, and outdoor-inspired looks.
Meanwhile, Foot Locker has identified three pilot locations for its new “store of the future” concept with intentions to open the first in Q1/24. The stores are being designed to deliver an omni-connected retail experience for customers. The group has also established a new global Foot Locker brand position ahead of its 50th anniversary in 2024 that will debut during the holiday period.
Dillon told analysts that the group intends to increase its percentage of off-mall stores to 50 percent of its door total by the end of 2026 with new, larger “Community” or “Power” stores to represent approximately 20 percent of the total and offer customers more brand presentations and footwear categories for men, women, and children.
