Breaking It Down: Foot Locker, Inc.'s Q2 2014 Earnings Call

| About: Foot Locker, (FL)

Summary

Foot Locker reported better than expected earnings and sales.

The company has an extremely strong balance sheet.

Management was unclear about the long-term positioning of the company.

Background

On August 22, 2014, Foot Locker, Inc. (NYSE: FL) reported 2Q 2014 earnings of $92 million ($0.63 per share) on sales of $1.64 billion compared to $66 million ($0.44 per share) on sales of $1.45 billion a year earlier. These results beat Estimize-reported consensus earnings estimates of $0.54 on sales of $1.57 billion. Per-share numbers are based on a diluted share-count of 146.4 million in 2Q 2014 and 151.4 million in 2Q 2013

Foot Locker is a primarily mall-based retailer of athletic apparel and footwear. The company's primary products include athletic shoes, accessories and apparel. The company's main brands include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Foundation, and SIX:02. Additionally, the company also sells Jordan and Nike LeBron brand shoes. As of August 2, 2014, the company operates 3,460 stores. Its most direct competitors are DSW, Inc. (NYSE: DSW) and Finish Line, Inc. (NASDAQ: FINL).

Key Points

  • Same-store sales increased 7%
  • Gross Margin expanded to 32.0% from 31.2% in 2Q 2013
  • Opened 14 new stores, remodeled 112 stores, and closed 18 stores. Currently operates 3,460 stores.
  • Cash, Cash Equivalents and short-term investments of $957 million
  • Debt of $137 million
  • Year to date, has returned $200 million to shareholders via dividend and repurchases, equivalent to $1.37 per share
  • Declared dividend of $0.22 per share for the quarter (annual yield of ~1.6%)
  • On track to close "just over" 100 stores in the year
  • International double-digit growth
  • Tax rate of 36.3%
  • Champs Sports reported a mid-single-digit decline in sales

Guidance for the year

  • Mid single digit same-store sales gains
  • 20-40 bp of leverage gain in gross margin
  • 30-50 bp gain in SG&A rate improvement
  • Targeting $220 million of capex
  • Double-digit gain in EPS

What to look for in Q3

Foot Locker Europe product mix

Foot Locker Europe reported single-digit same-store sales, although it also reported declining year-over-year sales in apparel. Management explicitly stated that it is looking to expand its Foot Locker Europe business, so it will be interesting to see how they adapt their product strategy to this market.

Capital Structure and potential investment

The company currently has a sizable cash pile of $957 million ($6.54 per share) and debt of only $137 million, which means that the company can make substantial investments in remodeling existing stores, opening new stores and investing in its smaller businesses. Alternatively, management may opt to continue to return cash to shareholders via dividends and buybacks.

Positioning for 4Q and holiday season

Foot Locker has typically had a very strong 4Q performance from holiday sales, and it will be interesting to see how they plan on positioning the company in terms of product mix and store investment (i.e. remodeling) going into this period.

Endorsements and additional models?

In the athletic shoe business, there are some particularly high margin lines. Management didn't specifically break down the individual sales figures, but it's clear from their discussion on the company's Jordan and LeBron lines that they are big sellers and drive a lot of store traffic. That brings up the issue of sponsorship - their products are endorsed by legends, but is management looking to secure any more big-time endorsements for the Foot Locker brand itself?

Quick Take

The company posted solid results in the quarter, and management was quick to go right into the statistics. They gave a lot of detail about the company's performance across a variety of categories and highlighted the good (footwear sales) and bad (apparel sales), which shows that management is willing to discuss what needs to be improved upon. However, a lot of their reported statistics were open to interpretation, as they were quantified as "mid-single-digit" or "mid double-digit" when reporting sales growth or decline. A little more precision here would have been nice.

Additionally, management provided guidance for the rest of the year, which was encouraging, although I wish they would have further quantified the company's expected "double-digit gain in EPS." When pressed to expand upon this "double-digit" EPS figure, management declined to answer.

Beyond the quarterly results, management spent most of its time talking about specific apparel items and products that drove sales, which was nice, but there was very little discussion as to what the company's long-term plan of action is. I wish one of the analysts in the Q&A session pressed management to talk a bit about the company's $937 million cash balance and get them to disclose some details about what they want to do as far as investment opportunities. The company has a healthy balance sheet with $957 million in cash and short-term investments and only $137 million in debt. There is clearly something more that they can do with their cash beyond remodeling existing stores and returning the cash to shareholders via buybacks and a 1.6% dividend yield. This company is in fantastic financial shape, but without much guidance, it is difficult to understand how management wants to position the company for the long-term.

Transcript is available here from Seeking Alpha, conference call and financials are available here.

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The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.