Foot Locker’s Q2 Tops Wall Street Targets, Outlook Slightly Lowered

Foot Locker, Inc. reported second-quarter earnings declined sharply versus year-ago levels but topped Wall Street’s consensus estimate. The sneaker giant now sees full-year results arriving at the lower end of previous guidance.

“Despite an increasingly challenging macroeconomic backdrop, we delivered a solid quarter against the favorable fiscal stimulus and promotional environment from last year,” said Richard Johnson, chairman and chief executive officer. “Driven by strong execution from our team and ongoing progress against our key objectives, we grew our sales 16.4 percent above levels from 2019.”

Johnson continued, “Our strategy of diversifying our brand portfolio and offering more choice continues to resonate with consumers and is enabling us to expand our customer base. We are confident that our operational excellence, our improving ability to fuel our customer’s desire for self-expression, and the secular trends driving our categories, put us in a strong position to navigate the expected ongoing macroeconomic headwinds in the back half of 2022.”

Second Quarter Results
The company reported net income of $94 million, or $0.99 per share, for the 13 weeks ended July 30, 2022, compared with net income of $430 million, or $4.09 per share, for the corresponding prior-year period.

On a non-GAAP basis, the company earned $1.10 per share, compared with non-GAAP earnings of $2.09 per share in the prior-year period. 

Second quarter comparable-store sales decreased by 10.3 percent versus record sales levels from last year. Total sales decreased by 9.2 percent, to $2,065 million, compared with sales of $2,275 million in the second quarter of 2021. Excluding the effect of foreign exchange rate fluctuations, total sales for the second quarter decreased by 6.1 percent.

Gross margin declined by 340 basis points compared with the prior-year period, driven mainly by higher markdowns, as the promotional environment started to normalize after last year’s unusually favorable backdrop, followed by supply chain costs and occupancy deleverage.

SG&A was deleveraged by 210 basis points, driven mainly by labor inflation and the decline in sales. 

Non-GAAP earnings of $1.10 compared with Wall Street’s consensus estimate of 80 cents. Sales of $2,065 million compared with Wall Street’s consensus estimate of $2.1 billion.

Year-To-Date Results
For the first six months of the year, the company posted net income of $227 million, or $2.36 per share on a GAAP basis, compared with $632 million, or $6.02 per share, for the corresponding period of 2021.  On a non-GAAP basis, earnings per share for the six-month period totaled $2.71, compared to $4.05 per share in the prior year period in 2021.  Year-to-date sales were $4,240 million, a decrease of 4.2 percent compared to the sales of $4,428 million in the corresponding six months of 2021. Year-to-date, comparable store sales decreased 6.2 percent, while total year-to-date sales, excluding the effect of foreign currency fluctuations, decreased by 1.7 percent.

Financial Position
As of July 30, 2022, merchandise inventories were $1,644 million, up 52 percent compared to the supply-constrained levels at the end of the second quarter last year. Current inventory quality and aging are healthy, positioning the company well for the Back-to-School season and the third quarter overall. At quarter-end, the company’s cash and cash equivalents totaled $386 million, while debt was $455 million.

During the second quarter of 2022, the company repurchased 1.4 million shares of its stock for $40 million and paid a quarterly dividend of $0.40 per share, for a total of $38 million. 

Financial Outlook
Andrew Page, executive vice president and chief financial officer, said, “Following our solid results for the second quarter, against record results last year, we remain confident in our ability to achieve earnings within our original guidance range. But recognizing that the back half will likely see more pressure than we originally anticipated, we now expect to be at the lower end. Our balance sheet, real estate flexibility, and relationships with vendors all remain strategic assets that will aid us in navigating ongoing macroeconomic volatility while we continue to serve the sport and sneaker communities.”

The updated outlook for the year calls for:

  • Sales to be down 6 percent to 7 percent, versus previous guidance calling for sales to be on the upper end of down 4 percent to 6 percent. The change was attributed to the sale of Eastbay’s team sports business to BSN Sports and foreign exchange pressure.
  • Comparable sales to be down 8 percent to 9 percent versus previous guidance calling for comps to be at the upper end of down 8 percent to 10 percent.
  • Gross margins to be in the range of 31.1 percent to 31.2 percent, up from 30.6 percent to 30.8 percent previously. The change was due to better occupancy trends and supply chain costs, partially offset by higher markdowns.
  • The SG&A rate to range from 21.3 percent to 21.4 percent, up from 20.7 percent to 20.9 percent previously. The change was due to ongoing inflation pressure.
  • Non-GAAP EPS to range from $4.25 to $4.45 versus being at the upper end of $4.25-$4.60 under previous guidance.

Photo courtesy Reuters

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