Foot Locker lowers FY22 outlook slightly, but stock soars on CEO hire

U.S. retail chain Foot Locker, which operates 630 doors across Europe, has modified its FY22 outlook downward due to likely additional pressures on its H2 business. But the revision, coupled with a 9 percent decline in second-quarter sales and a 76 percent drop in Ebit for the period ended July 30, failed to impact the retailer’s stock negatively. Instead, the group’s announced hire of Mary N. Dillon, executive chair and CEO of Ulta Beauty, Inc. as president and CEO to replace the retiring Richard A. Johnson, sent Foot Locker shares up more than 20 percent late Friday to close at $38.39 a share. Evercore ISI analysts called Dillon’s appointment a “huge win” for Foot Locker in a note and called her “one of the best operators in retail over the past decade with an incredible track record across digital, customer experience and innovation.” 

In Q2, Foot Locker’s operating income fell 47 percent to $139 million from $264 million as total sales slipped 9.2 percent to $2,065 million from $2,275 million. Excluding currency impact, period revenues were down 6.1 percent. Comparable-store sales decreased 10.3 percent year-over-year, falling 16.1 percent in North America but rising in low-single digits in Canada and 4.5 percent in the EMEA, with particular strength in France, followed by Germany and Spain. Two dozen European markets reported double-digit sales increases, although U.K. results were described as soft. Real estate investments in Paris, Berlin and Florence drove traffic across the continent and a better conversion opportunity for customers.

Non-Nike sales were described as up high single digits in core banners as brand sales for Converse and Vans each rose more than 20 percent, and New Balance and Crocs were each up more than 50 percent during the period. Foot Locker called Puma’s MB.01 basketball shoe one of the category’s best sellers. The Hoka brand is being rolled out in select stores and online at footlocker.com, while the On brand is now available in some Foot Locker Europe stores and 95 doors worldwide. Sales of Brooks and Asics were each up more than 40 percent in Q2. After a strong start in May, Foot Locker experienced slowing sales in June through mid-July before regaining some momentum due to the beginning of back-to-school in some markets. While the group anticipates a strong back-to-school season, it is concerned about the period between b-t-s and the holiday season due to “a more challenging macroeconomic environment.” 

Supply chain costs and higher markdowns contributed to a year-over-year decline in Q2 gross margin to 31.7 percent from 35.1 percent. Attributable net profit for the period declined 75 percent to $94 million from $430 million.

Foot Locker’s slight modification to its FY22 outlook now forecasts a 6 to 7 percent sales decline versus prior guidance of the “upper end” of -4 to -6 percent, citing currency impact and divestiture of its Eastbay team sales business. An annual comparable store sales decline of 8 to 9 percent estimates a softer-than-expected H2 when comps may be down 10 to 12 percent year-over-year. 

The retailer, which continues to face higher labor costs, intends to open 100 new stores this year, including 40 community and power locations, and close 190 doors. WSS and atmos banner growth is now pegged at 20 and two, respectively, down from an initial forecast. Foot Locker’s overall store count will be down 3 percent in 2022, but square footage will decline less than 2 percent. Inventory, up 52 percent at Q2 end, is forecast to slow but still be up at year-end due to the ongoing merchandise assortment diversification effort.