FL: Early Read

Takeaway: Solid Q confirming concerns over slowing sales were overstated. With $3 in EPS now squarely in view next yr we expect FL to work through YE.

Solid quarter out of FL coming in at $0.63 (adj) vs. $0.54E and our $0.59 expectation. Comps came in at +10.2% slightly higher than our +9.5% estimate and well above consensus (+7%). As always, we’ll get further detail on the call (at 9amEST), but we suspect domestic comps came in up low-to-mid double-digits offset by slower international growth of flat to slightly down. As noted in our 10/20 note ‘FL/FINL: Stealth Strength in Athletic Specialty,’ concerns over slowing sales were overstated due to a widening spread between the athletic channel and industry.


In addition, we’ll get the customary month-to-date comp update which we expect to be one of the least encouraging in recent quarters due to the impact of Sandy – this is not new news to investors. We suspect sales are likely running negative with weekly industry trends reporting sales down -6% November-to-date (see table below). While this sample consistently understates performance in athletic, we wouldn’t be surprised to learn that sales are down to start the quarter.

 

Gross margins came in essentially in-line with more modest SG&A spend accounting for the EPS upside. SG&A spend was flat yy leveraging 202bps. Taking into account $7mm in vacation pay accrual adjustments last year, SG&A was up +2%. With an estimated $2mm benefit from Fx and further growth in marketing investments, the spread between core SG&A and revenue growth continues to drive meaningful margin expansion.


Inventories marked the twelfth consecutive quarter of a positive sales/inventory spread though down 4pts to +6% which likely reflects some initial inventory build related to the storm at quarter end. This continues to put FL in a very good position to manage merchandise margin pressure near-term and gross margins through year end against easing compares.

 

FL is clearly continuing its momentum following a significantly more challenging 1H printing EPS 17% above expectations. Basketball continues to be a favorable tailwind given last year’s disruptions though we suspect that the company’s women’s initiatives are starting to play a more significant role in driving top-line in recent months as well. We expect plenty of air-time on the call to be allocated to the recently announced SIX:02 women’s only concept that will be tested this holiday season. This makes a ton of sense as the company looks to increase its women, kids, and apparel mix as well as growing the international store footprint (more productive that domestic base), and expanding digital platform to drive business over the next several years.

 

With a favorable setup through year-end, we expect more opportunity for further upside in performance. With $3 in EPS now squarely in view next year, we expect this one to rebound and work higher over the intermediate-term.

 

 

FL: Early Read - FL S

 

FL: Early Read - FW sales

 

FL: Early Read - FL FW sales chart

 

 

 

 


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