FL: 1Q12 Report Card


Conclusion: FL's 1Q results support our positive outlook on the name. The incremental deltas in the quarter reflect that not only is there still substantial operational improvement from key initiatives ahead, but also that European results weren’t as onerous as expected. In fact, Europe has turned positive May-to-date, which is a stark contrast to most other retailers with exposure to Europe. With early indications suggesting a solid start to Q2 and compares getting easier in 2H, we like the name here.


We continue to think the key growth initiatives that will play the biggest role over the intermediate-term will be in women’s and apparel.

 

1) In Lady Foot Locker, a redesigned store format is expected to be set by Fall. In the meantime, the company is adding significantly more apparel to the mix with the addition of bra and bottom bars. Women already come into Lady Foot Locker for shoes. What this mix shift presents is the opportunity to drive incremental traffic looking for apparel. With this banner still operating below all others, we expect the seismic shift in strategy to be nothing but an incremental positive.


2) As for apparel, the company is adding more of it to the mix. Margins remain below footwear, but the gap continues to converge. It’s not just the product itself that will be traffic driver, but how the product is presented that is likely to provide the biggest boost to traffic initially. One of the most notable changes to new store format in the works is to take all apparel and display it on the wall and in turn move all footwear to the floor. With the early success of this format, we’d be surprised if we don’t see broad adoption by year end. Moreover, the emphasis on presentation will likely increase vendor interest in showcasing a greater assortment of exclusive product i.e. better for both parties.


The positive momentum behind this story remains firmly in place and is so far driving solid results at a time when it should be its most trying. With tailwinds and easing comps come 2H, we are shaking out at 5% and 10% above consensus for this year and next. With many of these initiatives not kicking in meaningfully until next year, investors that were concerned over European exposure can check that box and now have greater visibility into forward earnings – especially relative to other retail peers.

 

What Drove the Beat?

Strong sales with tighter cost control drove the $0.09 beat relative to $0.74E. Importantly, this was the tenth consecutive quarter of a positive sale/inventory spread and a sequential improvement up 3pts to +10% against tough comps. Positive spreads and gross margin expansion continues to be the new normal for FL and the expectation.

 

Casey Flavin

Director

FL: 1Q12 Report Card  - FL S

 

Outlook: In order to properly measure performance relative to original expectations, we look at management’s Q1 results relative to management guidance as well as any updates to previously provided full year 2013 outlook:


FL: 1Q12 Report Card  - FL outlook

 

Highlights from the Call:

 

Comps: +9.7% (DTC up +16.5%; Stores +9.1%)

Feb = +High-teen

March = +HSD

April =  +MSD

**May-to-date comps in-line at +HSD

 

All of divisions posted positive comp ex-Eur

Europe finished Q1 with -MSD comp decline after starting Feb
down -HSD (March/Apr -LSD)

Europe is now up LSD

FL US, FL Canada, and Foot Action all up ~DD

 

Champs comps 20%+

DTC +16.5%

CCS positive comps, but less than rest of DTC

Suggests rebranding launch in Feb gaining traction perhaps indicating turn

 

FW/App/Acc all up strong; Apparel up nearly +20%

In FW - Men's and kids strongest, women's was mixed

In Men's - basketball strongest, training and classics also strong - running positive but smaller

In running, NKE Free and New Balance Minimus very strong

 

GM:  +132bps due to:

  • Occupancy +100bps
  • +30bps from merchandise margins
    • Higher in US across divisions led by apparel
    • margins down slightly in Eur
    • FW margins increased, stayed ahead of apparel margins

SG&A:

  • SG&A increased by only $8mm
  • Kept tight control over store wages
  • Spent $2mm more on marketing
  • Showing success with increased traffic and conversion rates

Stores:

  • Opened 25 stores most in Eur
  • Closed 34 stores most in U.S.
  • Will continue to close unproductive stores over balance of year

BS:

  • Inventory - up slightly on Constant currency basis
    • Turns improving
  • $909mm in cash
  • CapEx: Board approved add'n $10mm increase in Capex plan to $170mm from $160mm
    • Some of incremental increase specifically intended for women's and tech upgrades in allocation and warehouse mgmt systems
  • Repo's 878k shares for $27mm - first under $400mm SRA

Outlook:

FY:

  • Expect MSD comp
  • Can chase if demand warrants
  • Expect further GM leverage, but more modestly than in recent years
    • 30-40 bps in Q1 in-line
    • SG&A down 60-80bps (could be a bit higher given Q1)
  • Fx impact less than $0.01 in EPS in Q1
  • Expect similar impact in Q2
  • FY Fx would impact EPS ~$0.05 (in-line with plan)

Categories:

  • Basketball key driver
    • Strong Jordan also in classics, retro Jordan sold out almost immediately
    • Adidas very strong in stores and online in both Rose as well as Hardcore and Somoa
    • Converse contributed as well
  • Running not as strong, tech and lightweight offset by legacy styles
    • Europe saw boost from intro of NKE Free during Q1
  • Slides were a big category in the qtr
  • Apparel: NKE Jordan , Adidas, and UA fleece all performed well

Update on Initiatives:

 

Apparel: 

  • intro new Nike NFL apparel in Champs stores
  • New women's bra and bottoms in Lady FL stores
  • Lady FL apparel sales significantly outpaced FW

Kids:

  • Has been very strong recently off a small base
  • Have planned several pop-up stores for BTS
  • Planning to open select kids stores in Europe this yr
  • Allocating more product towards kids

Women's:

  • In the process of coming up with a redesigned Lady Foot Locker format (as discussed at analyst day)
  • Also mentioned that they are testing a new women's concept altogether
  • Will be some time before they get full feedback on it

 

Q&A:

 

Women's /Lady Foot Locker:

  • As part of the new women's growth initiative, part of adding more apparel includes bra and bottoms bars
  • Looking at having new store design nailed down by fall
  • Women already coming in for shoes, looking to offer more apparel to drive incremental traffic
  • Looking to have new concept prototype in place by end of the year to test new growth in women's
  • Still performing below the level of men's chains = room for substantial upside - can match men's

New Store Formats:

  • Will have 10 new prototypes in for Champs by end of Spring that they will be able to measure to gauge roll outs next year
  • Core FL prototypes about 6mo behind Champs

Europe:

  • Greece "somewhat of a basket case" only 6 stores there
  • Southern Europe (Port, Spain, Italy) more challenging - still productive and profitable stores
  • Northern Europe (Ger, Fr, Benelux, etc) - performing better
  • See it as a three tier performance environment
  • NKE Free was a positive performer, Adi classics, Converse
  • Apparel (a bigger business in Eur) has underperformed - down a little bit (-LSD)
  • Think colder weather hampered sales
  • Now running up a little bit
  • Forecasting apparel down LSD for the year
  • Fashion getting more impacted due to higher unemployment
    • Ex: selling NKE Free better up in North Eur; well in South and more challenged in Italy and Spain. Fashion more discretionary.

Private Label:

  • Branded remains very strong, private coming on
  • 'vendors coming out with some great product' - NKE and Adi in particular
  • Continuing to improve PL margins - branded still higher but improving
  • Shifting some of private brand business to Team Edition printed apparel from the brands

Running:

  • A lot of newness coming out - Lightweight is really driving the business
  • Re tougher comps in 2H - Olympics will help
  • People shifting from higher ticket heavier FW to lower ticket lightweight which is reducing overall sales $$

UA Relationships:

  • UA - realizing to be successful in the mall, need to work with FL
  • Expect tailwind from World Cup, Olympics, full season of FB and BB

Fw/Apparel Margins:

  • Footwear margins still increasing - cont to increase product flow that is driving expansion
  • Apparel still below FW margins, did narrow the gap
  • As they build apparel business, expect margins to expand
  • Higher FW margins driven by:
    • Selective pricing to offset higher AUC
    • Product flow is resulting in more full-price sales
  • Still expect 30-40bps of expansion for the balance of the year
  • Gap b/w IMU to AUC has narrowed - product flow has helped offset

Europe - Event Impact on SG&A:

  • Will get benefit from 1) apparel (t-shirts to high price letter jackets), and 2) shoes similar to what athletes are wearing
  • New technology in shoes will drive interest + traffic

Comps:

  • Traffic, AUR and conversion were all up in 1Q

Europe - Competitive Env:

  • Competition getting weaker and some bankruptcies have enabled them to take over some leases
  • Added 6 stores in Poland and Czech-Rep
  • Those stores doing very well, expect to open more in these regions

Product Costs:

  • Expect further increases expected - mostly from labor increases, but more modest in 2013

E-commerce:

  • In non-East Bay sites, (FL, Lady FL, Champs, Kids FL, banners are up +3-40%
  • Under penetrated in Eur
  • Have sites in UK, Benelux, France, Germany and planning to roll out to Southern countries - planning to add 1-2 by year end with more next Spring

SG&A Costs:

  • Expect roughly 60-80bps of leverage each qtr
  • Expect continued incremental marketing spend

NKE - Flyknit:

  • Will launch in best running stores and on Eastbay - expect bigger boost to come in 2013

Basketball/Running Mix:

  • New tech in lightweight drove demand for running increasing share over last 1yr+
  • 3 things have driven recent surge in Basketball:
    • 1. New tech - lightweight & support
    • 2. Number of key players with own shoes has grown - no longer just Jordan, LeBron, etc.
    • 3. Better styling

Store Openings / Rent:

  • Still pulling out of underperforming stores - see more opportunities there
  • Opening more Champs stores as % of new opening mix - more underpenetrated + better performing

Champs Outperformance:

  • First banner to be defined and clarified - about 6-8 months ahead of other banners
  • Pushed apparel and straightened that out sooner than others
  • First to step up marketing for = realizing those efforts
  • Expect other banners to start ramping  as well, but not necessarily to degree that Champs has (20%+)

JCP/NKE Shop Threat:

  • Nike currently sells product at JCP at a lower level
  • Not as concerned bc FL's NKE product higher level = better quality
  • Typically when others open in the mall, helps FL - drives traffic to them bc better assortments
  • "our merchants and our position in the market with Nike will allow us to be well-positioned and to be able to beat somebody who that's not their forte." - Ken Hicks

Basketball:

  • Competitive advantage bc of exclusives
  • Have best assortment from key players NKE, Adi, UA, and Reebok
  • Vs. running where they have benefitted similarly to everyone else
  • Still think they can have more running - underpenetrated

 


















 





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