Comp expectations are reasonable, FL simply does not do the ‘miss’ thing. But 2H guidance looks high. Perhaps the company pulls out a sandbag on Friday’s event, but sandbags materially lose relevance and efficacy when it is on a sharply decelerating growth and cash flow algorithm.
- Will this be the third miss in 21 quarters? Probably not.
- Comp expectation are in check at +1% -- though there are clear expectations for a 200-300bp sequential acceleration in 3/4Q.
- FL’s comp guidance – tracking history – is usually within 200bp of guidance. But the trend is clear that we went from 7-years of beating on the higher end by 300-400bp, to coming in at the mid-low end of the range for the past five quarters. That’s likely gonna be the trend for the next 2-3 years – unless FL meaningfully resets the growth/profit algo.
- Highly unlikely to reverse erosion in e-comm. This is a trend across nearly every retailer. The ‘let’s shop online’ trend is ebbing relative to the growth of yesteryear (yes, I just said that). We’re seeing mean-reversion to a 10-15%ish ecom growth rate across the board. Still solid, but no longer spectacular. There needs to be a strong link between in-store experience and online to drive online traffic from here. FL is hardly at the forefront here.
- Nike selling on Amazon is worse than the consensus thinks. Nike is going in high – ie close to FL price point. Likely with a redesigned brand-centric UI. Terms are good for Nike…AMZN will use this as a selling tool to bring on big higher-end brands – everything from Ralph, to Williams-Sonoma, to Tiffany. Yes, seriously.
- Re Brands…
- New Nike platforms won’t hit critical mass for another 2 quarters at retail.
- Adidas still hot, as we all know, but growth in NA down to ‘only’ 36% from 42%. Not a big slowdown, but no longer an acceleration.
- UA on the ropes. Maybe pushing sub-par product into FL w better terms.
- Keep in mind that substituting a $160 Nike shoe for a $110 adidas, or $90 UA is GM% accretive (those brands let FL keep a greater % of profit), but the absolute GM$ comes down. That’s comp…and difficulty in leveraging occupancy.
- The 3-year deceleration in basketball sales at FL is going to be hard to break without the product lead. And the product is not there.
- SIGMA out of 1Q was bad. Eroding margins and building inventory. Not good for 2Q GM.
- If there is one number I’m watching it’s the incremental comp $ vs the incremental SG&A dollars. It’s reversing. Period. When Nike drives traffic, ASP and comp for a decade and FL leverages SG&A by 500bps by underinvesting in both stores, corporate and capex – the leverage can only go the other way when Nike shrinks. The deleverage has started, and it should continue.
-- McGough
Revenue
Comp
Comp expectations seem reasonable as we did see some demand shift and snap back last year coming out of 1Q.
The question being is the product and brand heat supportive of a 2H comp reversion?
Comp vs Guide Commentary
FL rarely misses expectations. Last Q's EPS miss was just the 2nd in the last 20 quarters.
Looking at recent comp guides vs actual, the trend is often outperformance, with latest 1Qs looking shaky.
Ecommerce
Slowing like much of retail. Slightly easier compare, but unlikely to reverse trend.
Nike / UA / Adidas
Adidas brand slowed 42% to 36% in NA… but still up 36%. Fashion/classic styles looking less hot on the margin, but still growing.
UA NA and Footwear slowing to zero after being a comp help to FL via new product.
Nike NA futures slowing to -10% from -9% last Q, and +6% last year.
Basketball
Tougher basketball compare, but is there delayed demand shifting from 1Q from weak All-Star launches and delayed tax refunds? Note…we don’t buy the tax refund excuse. The core FL customer won’t NOT buy a pair of kicks w a cash purchase bc a tax refund comes late (if the person files at all).
Gross Margin
FL leverages occupancy at low mid single digit comp, maybe it can see leverage in 2H.
Bad SIGMA move, similar to 1Q of 2016, margins down with inventory worse on the margin (building for the first time in 30 quarters).
Merch margin compares getting easier.
Incremental SG&A Margin
As Nike % is reverting, the incremental SG&A required to drive incremental revenue appears to be accelerating.
