FINL’s comp of +6.5% came in just above the Street’s +5.7%, but below our proprietary blended rate that suggested comps of +8% during the quarter (our index is based on what FINL SHOULD have reported based on its mix and weighting in footwear and apparel relative to the reported NPD/SportscanINFO numbers). This is the second time in the last four quarters that FINL came in short of the blended rate with comps coming in only 30bps above last quarter – far different than FL’s margin of outperformance of at least 200bps relative to the index over the last three quarters.
We believe this suggests FL is likely gaining share in the industry. This isn’t a zero sum game and it’s not time to hit the panic button on FINL. Athletic footwear sales continue to be strong and the pipeline in the near-term suggests this momentum is likely to continue, but the reality is that these two retailers are growing at different rates. A factor to keep in mind here is that 1-point of comp equates to something quite different for each retailer. In fact, a 1-point change in comp at FL equates to just over a 4-point change in comp for FINL on an absolute dollar basis. Therefore, even if we were to assume that FL is capturing the entire difference, it’s not a 1-for-1 exchange, but rather FL would gain roughly a 40bps benefit to comp if this were indeed the case.
Some additional highlights of the quarter were the strength of FINL’s e-commerce business up over 55% and better than expected product margins more than offsetting the drag from toning. It’s worth noting that CEO Glen Lyon mentioned that the industry was the most “rational” he’s experienced in his 10-years with the company, which is good for margins – at least in the near-term. While apparel sales were up +3.3% during the quarter, they came in below industry trends and remain a continued area of focus for the company. All in, with Q2 marking the easiest comp of the year for FINL and both occupancy and product margins coming in better than expected and likely to persist at least through the next quarter, we’re shaking out at $0.41 for Q2 and $1.57 for the year above current Street estimates of $0.39 and $1.53 respectively.
While industry trends continue to benefit the FINL business, we see FL as the greater beneficiary of these trends over the intermediate-term. With continued progress in merchandising (particularly in apparel) and marketing (specifically e-commerce) in addition to the Foot Locker’s leading position in the industry, which affords the retailer access to exclusive product in all the key categories, FL remains one of our top long ideas here headed into the 2H. We’re at $0.16 for the quarter vs. Street at $0.13 with FINL results giving us further confidence in our above the Street estimates.