Athletic footwear retailer Foot Locker (FL) reported fantastic third quarter results. Total sales soared 9.3% year-over-year to $1.5 billion, easily exceeding consensus estimates. Earnings growth was spectacular, surging 60% year-over-year to $0.69 (up 47% net of a tax allowance), which was much better than consensus expectations. To read how we calculate the intrinsic value of Foot Locker and hundreds of other firms in our coverage universe, please click here.
We've been bullish on North American athletic footwear for some time now, noting that Foot Locker is a North American derivative play on Nike (NKE). Another strong quarter was headlined by several LeBron and Jordan Brand launches at higher average selling prices, as well as a new Adidas Derrick Rose shoe selling at a 45% price increase over last year's model. A huge boost in performance socks that sell for as much as $14 per pair, and other matching accessories also contributed positively to sales growth. As a result, same-store sales surged 9.4%, while Foot Locker's fantastic ecommerce unit (Footlocker.com, Champs.com, and Eastbay.com) sales grew 18.4% year-over-year. Management reported double-digit expansion across Footlocker, Kids Foot Locker, Champs, and Foot Action in North America, though Lady Foot Locker remains a bit weak, as does Europe. Apparel sales are also increasing at a nice pace, according to management, though we think it's most likely a result of the new NFL apparel license, as well as branded gear. We're not too optimistic about the company's push into private label apparel, but it hasn't hurt the firm yet.
Gross margins continued to trend upward, increasing 70 basis points year-over-year to 33.1%. Though initial mark-ups (IMUs) have been compressing slightly, discounting has also been falling while average selling prices have increased. We expect IMUs to compress going forward, since we think Nike and adidas are driving success rather than innovation at Foot Locker. We also think the threat of giving exclusive product to Finish Line (FINL) could keep margin growth in check. Still, the company has done an excellent job of closing underperforming stores and keeping SG&A flat, leading to spectacular bottom-line leverage.
During the fourth quarter, we expect the company to benefit from the release of several Jordan and LeBron launches, including the Jordan IV and the Jordan XI-the latter of which could be one of the most successful shoe launches of all-time. Same-store sales growth is trending in the mid-single digits, and the firm expects gross margins to increase 50 basis points compared to the same period last year. Though we're fans of Foot Locker, we have some fear of the running shoe cycle slowly declining, as well as increased competition from Finish Line and Nike's direct-to-consumer business. Consequently, we think shares are fairly valued. We're more interested in Finish Line due to its new partnership with Macy's, strong product potential, and our belief that its performance will slightly converge towards that of Foot Locker.