Solid quarter out of FL coming in at $0.83 vs. $0.74E and above even our $0.81 expectation. Strong top-line results suggest that concerns over the European impact are in check, or at least not elevating. Comps came in at +9.7% slightly higher than our +9% estimate and well above consensus (+6.7%E). While we don’t have detail into the exact composition yet (the call is at 10am), we suspect domestic comps came in low-teens offset by a 3-4pt drag from international business. We should also get a current read on the month-to-date sales both domestically and out of Europe.
Gross margins and SG&A both came slightly better than we expected. This suggests FL was able to generate added merchandise margin despite higher costs in addition to ~100bps of occupancy leverage and tighter cost control, which most likely came from corporate costs with marketing dollars headed higher.
As for inventories, this quarter marks the tenth consecutive quarter of positive sale/inventory spreads and a sequential improvement in fact up 3pts to +10% against tough comps. Positive spreads and gross margin expansion continues to be the new normal for FL and the expectation – such a departure from years past.
We’re now more than half way through 1H, which we’ve highlighted as the period when we’d expect more modest upside in performance given tougher comps and slowing growth particularly in Europe. So far, the company is managing through these challenges just fine. If Q2 is navigated with similar success we are looking at increasingly easier compares in 2H and $2.50 in EPS within reach. As noted earlier this week, we like this one here.
Casey Flavin
Director
