FL: Slowdown Schmodown

Intraquarter speculation surrounding a meaningful slowdown in Foot Locker's sales trends is now confirmed to have been purely baseless.  This was another solid quarter with the reporting of 4Q EPS of $0.39 per share, a couple of pennies above the Street and a few pennies shy of our robust $0.43 estimate (our key difference came on the gross margin line where we were overly bullish). The key to the quarter was simply better sales in which comps came it at a robust 7.3% (Street: 5%, Hedgeye: 6%). Gross margins were up 214 bps, in line with guidance and expenses were leveraged against the strong topline.

 

Two highlights to note. First, management continues to control inventories, growing them at a fraction of sales growth. Inventory increased by 2.1% while total sales were up 5.1%. Recall that inventory growth is targeted at a maximum of 50% of the rate of sales growth. Second, the balance sheet continued to improve sequentially as the company substantially improved EBIT and subsequent cash flow over the past year. The cash balance stands at $696 million or $559 million net of debt. We expect share repurchase to become more meaningful in 2011.

 

All in this was another solid quarter, which marks the first anniversary of CEO Ken Hicks arrival. Tomorrow morning’s conference call will provide additional details on the company’s plans for 2011 as well as some high level guidance. It’s safe to say that skepticism surrounding FL’s sales performance within the quarter was speculation at its best.  Just one year into the multi-year turnaround process and we are now seeing evidence of real market share gains. We expect that this trend will continue as the benefits of merchandising, marketing, and inventory management strategies are clearly taking hold with both customers and the company’s key vendors.

 

Below we republish a list of questions we have heading into the conference call:

  • 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 jumpstart the performance of the company’s e-commerce platform?  When is store delivery and real-time store inventory locating going to be a reality? 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?)

FL: Slowdown Schmodown - fl 4q

 

Eric Levine

Director


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