We attended Foot Locker’s analyst meeting and came away with essentially the same view we walked in with. There is still a great opportunity ahead for the company and the shares. On the flip side, it was clear that management, including CEO Hicks, is not going to offer up every possible detail, strategy, and plan on a silver platter. After all, there is a process here that is unfolding in front of us. One in which management has to earn the Street’s attention through results, not lip service. And one in which expectations are being set with a goal to exceed them.
What we heard was a broad based plan that was largely in-line with every bit of research we’ve put out over the past few months leading up to this strategic “unveiling”. There is no need to rehash the finer or broader points of the company’s publicly available PowerPoint slides. The broad objectives that we set out to examine in detail are the same objectives management is focused on. These include: improving assortments and differentiating the company sub-brands, developing and growing a meaningful apparel business, improving the in-store and online shopping experience, focusing on growth where it makes sense, increasing productivity (both sales and inventory), and building a team to drive results.
None of this is surprising or for that matter overly complex. Executing each of these points after years of risk aversion and lack of change is really what matters. For more details, take a look at our recently published Black Book or listen to a replay of our recent conference call on the subject (call or email us if you need details). To be fair, not everything we heard was already known or predicted before today’s meeting. A couple of details emerged that were in fact incremental:
- Management indicated that while apparel is a small percentage of the company’s overall product mix, its poor performance resulted in 50% of the overall decline in revenues over the past few years. Now that’s just bad. On the flip side, this also accentuates the opportunity to upgrade apparel. The benefits of a positive mix shift driven by an improved apparel offering are key to both productivity gains and gross margins.
- Management acknowledged that the company’s image as a basketball dominated retailer needs to change. This will come in the form of two initiatives. First, eliminate unproductive basketball SKU’s and fill the product vacancies with other highly productive footwear (i.e running). Second, actually step up development of House of Hoops, but in a targeted manner. This puts an emphasis on basketball in markets that warrant it, not just in a wholesale, homogenous manner.
- Marketing is likely to become a bigger part of the equation. Management will look to become more efficient with existing marketing spend, but will also step-up incremental spending as well. This is likely more of a 2011 event, but should it should be noted that management is focused on making marketing investments to drive sales and productivity. While not specifically addressed, we still believe there is substantial savings coming from the company’s catalog costs alone. Importantly, any increase in marketing will not occur until noticeable product adjustments have been made.
- Capex is also trickling higher over the next few years, likely towards a $140 million run-rate (currently $110 million). This will drive an improved in-store experience (i.e. remodels, refixturing) but also 60 new stores per year, primarily in Europe. Importantly, the company’s dividend remains fully intact and share repurchase is also on the table to put excess cash to work.
- While no formal commitment was made to a near-term timetable, it sounded like there will be noticeable product enhancements in place for back-to-school. Footwear is likely to see more meaningful brand additions and editing, while apparel may only be moderately impacted. From a sub-brand perspective, Lady Foot Locker is ahead of the overall chain in its efforts to upgrade its apparel to a more performance oriented presentation. Nike was highlighted as an important part of Foot Locker’s model, but no specifics were given on any near term product/marketing partnerships. We continue to believe these two are working closely together to potentially use a portion of the store base as a Nike only platform, as well as to develop exclusive programs for each sub-brand.
Overall we liked what we heard. Yes, there is always an appetite for more details and specifics. An effort to monitor real changes will require frequent visits to each of the company’s retail brands over the next several months. As the process to differentiate and upgrade product within the organization unfolds, it should become very clear that the company is making strides towards no longer competing with itself. Unfortunately, this will not take place overnight. The biggest risk in the near-term in our view is not if comps remain positive mid single digits, but rather how much hype is building. In our view, the five year plan is one that it is likely achieved in three years or less. It’s just less clear what is realistic to expect over the next few months. For this, we’ll just have to camp out at the mall and report back on the efforts underway.