Saddled with a 10.5 percent year-over-year increase in inventory but also gaining some traction with customers seeking innovation and latest trend products, Foot Locker has taken strategic steps to reach both deal-seeking customers and others who want premium, on-trend items from key brands such as Nike, Puma, New Balance and On. The group has pulled forward key inventory to ensure “smooth product flows” ahead of the holiday season and is opting to keep open some 30 planned Champs Sports store closures in Q4 to help liquidate excess inventory.
In Q3, Foot Locker reported an operating profit of $47 million, down 71 percent year-over-year from $160 million, and an 8.6 percent drop in total sales to $1,986 million from $2,173 million as comparable store sales fell by 8.5 percent due to persistent consumer softness, a changing mix of vendors and a 3 percent negative impact from the repositioning of the Champs banner. Digital comps were up slightly at 0.4 percent, excluding Eastbay. With a broad objective of reaching 25 percent e-commerce penetration over time, the company will introduce a newly designed Foot Locker app in 2024 focused on “improving the product launch experience, driving greater connectivity to stores, and increasing loyalty integration.”
With its loyalty program customers accounting for 23 percent of period sales, up from 22 percent in Q3/22, Foot Locker is said to be making progress on a plan to introduce the platform to the remainder of North America in 2024 and globally the following year.
Traffic was down year-over-year, and the group continued to see some pressure on average ticket in Q3 but did experience sequential monthly improvement in conversion bolstered by customer response to promotional efforts and demand for must-have items. Net income was down 71 percent to $28 million from $96 million in the year-ago period. Gross margin fell by 470 basis points to 27.3 percent as merchandise margins slipped by 370 basis points due to higher promotions aimed at liquidating inventory and reaching price-sensitive shoppers.
Third-quarter comparable sales were down 4.2 percent in Europe. Foot Locker says it’s working to improve the in-store experience and conversion levels in the geography while it stays focused on inventory management. With plans in place to re-ignite the Foot Locker brand in key EU markets, the company is already experiencing positive traction from its global brand campaigns, holiday product assortments and all in-store refreshes to date. Asia-Pacific comps declined slightly by 0.5 percent, with Foot Locker banner comps falling by 1.2 percent due to a promotional marketplace and lower consumer confidence, particularly in Australia.
With the results, the retailer narrowed its full-year non-GAAP EPS range to $1.30-$1.40 from $1.30-$1.50 as annual sales come in 8 to 8.5 percent lower than in FY22. Foot Locker shares rose more than 16 percent after the earnings announcement yesterday. Foot Locker’s overall store count will be down approximately 7 percent at year-end, but total square footage will contract only 2 percent as it converts more stores to larger footprints. New formats now account for about 13 percent of the group’s global square footage, up from 10 percent last year and closer to a FY26 target of 20 percent. Additionally, the company continues to make progress toward its objective of putting 50 percent of its North American square footage in off-mall locations by FY26. The percentage stood at 36 percent at Q3 end.
While pleased with the prospects for its basketball business going forward and its new marketing alliance with the National Basketball Association, Foot Locker continues to face challenges with its lifestyle running business. It hopes to have the segment’s inventory level “clean” by the end of the FY.
In performance running, Foot Locker is continuing to expand its On and Hoka businesses and seeing gains from the likes of Asics and Brooks. On is now available in 420 doors, ahead of a planned 350, and Hoka’s availability ahead of the holiday season was 150 locations.
For the holiday season, the group is enthusiastic about numerous premium footwear launches, including the scaling of Nike and Jordan signature basketball models, the AE1 from Adidas, key New Balance products, and Rihanna’s new collaboration with Puma plus Ugg classics and seasonal concepts and continued sales momentum from both Hoka and On.
