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Takeaway: Solid qtr as FL heads into a more favorable 2H setup. With $3 in earnings power next year, we expect this one to continue to work higher.

Solid quarter out of FL coming in at $0.38 (adj.) vs. $0.34E and in-line with our $0.38 expectation. Top-line growth of +7.2% despite a -3.4% Fx hit suggest concerns over European performance are in check. Comps came in at +9.8% slightly higher than our +9% estimate and well above consensus (+7%). We’ll get more color on the call (at 9amEST), but we suspect domestic comps came in LDD offset by a slight drag from the international business. We’ll get the customary month-to-date comp update and expect it to reflect an acceleration in sales headed into Q3. In an effort to keep this in perspective, August is the easiest comp of the quarter up MSD last year with Sept up HSD and Oct up LDD.

Gross margins and SG&A both came in a hair better than we expected. We expect merchandise margin to account for the 8bps differential coming in at a wash instead of a drag as management suggested despite higher costs reflecting the strength of current demand and product. SG&A was tightly managed leveraging 122bps against the highest incremental spend last year. We suspect the marketing costs accounted for the difference, but expect that delta to moderate in 2H as we head into the key BTS and holiday selling season.

Inventories marked the eleventh consecutive quarter of a positive sales/inventory spread flat sequentially with Q1 at +10% despite higher cost inventory. This puts FL in a very good position to manage merchandise margin challenges near-term and is gross margin bullish for 2H.

It’s also worth noting that the 2H will mark the first time since 2006 that FL reported an increase in net store openings reflecting slowing domestic closures offset by continued international growth – a positive tailwind given better productivity.

FL has emerged from a significantly more challenging 1H with flying colors printing earnings +12% ahead of expectations in each of the last two quarters. Headed into the 2H we’re looking at easing compares and a period where we expect more opportunity for upside in performance. With $2.50 in EPS now in view this year, we expect this one to continue to work higher as investors start looking out to $3 in earnings power next year (we’re at $2.86 vs the Street at $2.64) and the multiple begins to reflect the fact that this ship is no longer run by Matt Serra, but Ken Hicks.

Casey Flavin


FL: Early Read - FL S