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Conclusion: Blowout quarter for Foot Locker across all metrics.  Importantly this is only three quarters into a multi-year process.

For those who have been following the company for at least a decade, there is no probably no other time until now where you've seen the words "blowout" and "Foot Locker" in the same sentence.  The times they are a-changin'.

No matter how you slice it, Foot Locker’s 3Q results were nothing short of spectacular.  Same store sales up 8.1%, well ahead of our 5.5% estimate.  Earnings of $0.33, well ahead of our above the Street forecast of $0.20.  Gross margins just about a double from our forecast, increasing by 321 bps.  At the same SG&A was well controlled, although it appears there may have been some slight incremental spend into the quarter’s strong topline. We welcome a step up in marketing and store labor which will only accentuate the progress FL is making towards repositioning its brands.

From a balance sheet standpoint, FL continued to use its cash flow generation for modest share repurchase.  The company bought back $16.4 million worth of shares, paid its dividend totaling $70 million and also made a contribution the company’s pension plan of $40 million.  At quarter end, FL still has $400 million in net cash or just under $3/share.  Impressively, the topline acceleration comes with disciplined inventory management.  Total sales increased 5.4% while inventories declined 2.1%.  This marks the fourth quarter in a row of a positive sales/inventory spread.  We continue to believe after ten years of inventory growth exceeding sales, there is still meaningful opportunity to increase turns, reduce markdowns, and improve gross margins.

The only negative (and it’s a nitpicky one) stems from a lower than expected tax rate, which helped the quarter by $0.04.  All in this is the type of result that only confirms that strategies underway to strategically reposition the largest athletic footwear retailer are working.  Importantly, we do not believe that 3Q results which come only 9 months after CEO Ken Hicks and his team had a chance to influence change,  are the last in which we will see meaningful sales and earnings growth.

With the conference call slated for tomorrow morning, we expect to hear more about the company’s progress on its apparel initiatives, the successful launch of Under Armour basketball, the substantial opportunity that lies ahead in the near term with the accelerating basketball category, and potentially a hint at the company’s efforts to partner with NKE and the NFL on an NFL branded concept.

Our estimates move up to $1.15 for this year and $1.40 for 2011.  Recall that our original thesis called for FL’s 5-year plan to be accomplished in just 3-years.  It appears we and the company are on track.

FL:  The Times They are a-Changin' - FL 3Q

Eric Levine

Director