Foot Locker reports 4Q earnings on Wednesday 3/2 after the market close, followed by a conference call on Thursday morning. We continue to expect a solid 4Q result, with our model forecasting EPS of $0.43 well ahead of the Street at $0.37. The cornerstone of our forecast is a 6% same store sales increase coupled with gross margin expansion at the upper end of the guided range (+300 bps y/y). We note that promotional activity during the quarter was low, with very few promos occurring beyond the traditional holiday period. Recall that management suggested going into the quarter that they would strategically reduce promotional cadence if “sales were good”. We believe this was the case.
Beyond the quarter, which almost seems like old news at this point, we expect an update on the company’s strategic priorities for 2011 as well as some high level guidance. We remind investors that we do not expect Foot Locker (and specifically CEO Ken Hicks) to change its policy regarding conservatism. As such here’s a list of what we do and do not expect to hear on Thursday’s call. We also include several questions that we’d like to hear answered as current management anniversaries its first year on the job.
EXPECT TO HEAR:
- A step up in the company’s use of its cash balance primarily on share repurchase and capex. Capex should be north of the $110 million (up $10-$20 million) spent in 2010, with the incremental spending going towards store remodels and systems upgrades. We would not be surprised to see some incremental capital put towards the company’s e-commerce platform, which to some degree has been stagnant for a few years now. We expect the cash balance to be approximately $625-$650 million with the biggest variance coming from the possibility that share repurchase activity picked up during the quarter. The current repurchase plan had $215 million remaining on it at the end of 3Q.
- An update on where the company stands on year over year changes in merchandising. Through the fall, 60% of the assortment (primarily apparel) had been changed. Expect the number to be between 80-90% updated through Spring.
- Inventories are likely to have ended the year down 2-3% on an absolute basis as the company continues to work towards its turn goal of 3x. Guidance for inventories in 2011 should be down slightly.
- Store closings for 2011 should be well below 2010 levels. Expect 40-50 closings which represents a more “normalized” rate given lease expiration and real estate portfolio management. FL closed approximately 110 units in 2010, with most shuttered over the first three quarters of the year. Recall that the turnaround prospects for Foot Locker are not centered on shedding assets but rather on making the 3,500 store chain more productive.
- An update on the company’s banner segmentation efforts, which through 3Q were also about 60% complete. Recall that this process includes marketing and merchandising each of the company’s five core brands separately with a focus on unique customer segments.
- An update on the company’s testing efforts as they pertain to RUN by Foot Locker, CCS test stores, mobile marketing/e-commerce, and merchandising exclusives.
DO NOT EXPECT:
- Guidance in the press release or specific EPS guidance. Management’s history suggests that high level guidance will be provided on a conservative basis. Same store sales, inventories, gross margins, and SG&A will all be addressed. We do not expect any surprises here but still remain above Street expectations for 2011. Our estimate calls for $1.40 vs. the Street at $1.25.
WOULD LIKE TO KNOW:
- How big was the 2011 increase in co-op advertising? It appeared in 4Q that TV impressions were up substantially but at what (if any) cost? How is Foot Locker measuring advertising effectiveness now that each of the major brands are firmly behind the company’s resurgence as the leading global seller of athletic footwear?
- What is being done to jump-start the performance of the company’s e-commerce platform? When is store pick-up and real-time store by store inventory going to be a reality for the consumer? With double-digit EBIT margins, even modest growth here could and should be meaningful to the bottom line.
- How are the product trends in the US (running, basketball, toning) translating into Europe and Asia?
- When can we see more House of Hoops-like collaborations with your vendors?
- If an NFL lockout occurs what impact may this have on this year? Would this possibly help the impending launch of Nike’s NFL license given pent up demand may result from a NFL-free year?
- What if anything will Allen Questrom be focused on with his recent board appointment? He has a history of changing company cultures and attracting human capital. Will the organization see changes as a result?
- What have been the biggest challenges so far in re-assorting the company’s apparel programs, both private label and branded?
- What does a successful exclusive launch of UA basketball mean for future collaborations? (same for Li Ning? Is it significant enough to move the needle?)
Eric Levine
Director
