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FL reported a solid Q3 with EPS of $0.43 vs. $0.39E reflecting continued execution at the company level on top of strength in the athletic specialty channel. The company came in ahead of our expectations on every metric with the exception of SG&A.

Based on our model, we have Fx accounting for ~$7mm of the SG&A increase with the other $26mm reflecting a 9% increase in core organic spending and a continued sequential acceleration.

We’ll need to drill down exactly where these dollars went. If it was higher investment spend at the store level or into marketing initiatives like Champs and Europe to fuel growth, then we’re perfectly cool with that. But if it was deferred maintenance or higher incentive comp, then we’re not quite as jazzed.

Comps of +7.4% came in above consensus…again – though in-line with our 7.5% estimate. We’ll learn more about the composition of sales and just how Europe fared relative to e-commerce on tomorrow’s conference call.

Gross margins of +220bps came in better than expected and better than our above consensus +160bps estimate. With our model suggesting just over 100bps in occupancy leverage, we assume the balance can be chalked up to higher merchandise margins coming in better than the +90bps contribution realized in Q2. Having just faced the toughest comp of the year and with inventory growth in check, this is positive for FL’s Q4 outlook.

As for inventories, this is the first time since the company was renamed Foot Locker from Venator that the Sales/Inventory spread was positive seven quarters in a row. Having previously been what we called ‘Nike’s best off-balance-sheet asset’ FL was perennially in a position with a negative sales/inventory spread, and down gross margins.

Cycle or no cycle, this is a different company.

We’ll have more to add following the call.

Casey Flavin

Director

FL: Q3 Quick Take - FL SIGMA