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Foot Locker's (FL) Q2 Earnings Beat, Comps Increase 6.9% Y/Y

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Shares of Foot Locker, Inc. (FL - Free Report) gained 7.3% during the trading hours on Aug 20 following the release of stellar second-quarter fiscal 2021 results. Both the top and the bottom line increased year over year and surpassed the Zacks Consensus Estimate. The company delivered a fifth straight earnings beat and a second consecutive sales surprise for the reported quarter.

Results were buoyed by a solid performance across the women's and kids' footwear businesses, and robust demand for apparel and accessories offerings. These factors together with greater limited promotional activity drove the top and the bottom-line performances in the quarter.

Strong trends in the fiscal first quarter continued into the fiscal second quarter. The company’s FLX membership program continues to gain traction as it exited the fiscal second quarter with above 25 million members compared with 20 million members at the end of the preceding quarter. The company’s product pipeline with strength in the basketball category and apparel continues to be impressive.

It gained from strength across both stores and digital channels. Its digital sales penetration rate was 20.1% in the fiscal second quarter, well above the 2019 levels and this trend is likely to continue. For the reported quarter, the company’s global fleet remained open for nearly 94% of the possible operating days with temporary closures in Canada, some markets in Asia and Germany.

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Over the past six months, shares of the company have gained 6.5% against the industry’s decline of 9.8%.

Q2 Metrics

The athletic shoes and apparel retailer posted adjusted earnings of $2.21 per share, which surpassed the Zacks Consensus Estimate of $1.08. The bottom line improved above 200% from 71 cents per share earned in the prior-year quarter and 66 cents a share recorded in second-quarter fiscal 2019.

Total sales of $2,275 million grew 9.5% year over year and came ahead of the consensus estimate of $2,111 million. Excluding the foreign-currency fluctuation impact, total sales rose 7.3%. The top line also jumped 28.2% from the second-quarter fiscal 2019 reading.

Comparable store sales (comps) grew 6.9% in the quarter. In May, the metric was above 50%. However, in June, the same declined high-single digits. In July, comps were down low-single digits with an improving momentum as it progressed through the month.

Foot Locker, Inc. Price, Consensus and EPS Surprise

Foot Locker, Inc. Price, Consensus and EPS Surprise

Foot Locker, Inc. price-consensus-eps-surprise-chart | Foot Locker, Inc. Quote

In North America, the company’s Kids Foot Locker and Champs Sports banners delivered double-digit comp gains. Management has been making a significant progress in its North America portfolio and fleet transformation strategy for a while now. It decided to wind down its Footaction banner by the end of fiscal 2022 while focusing on core concepts.

The company completed its first Footaction store conversion and reopened as a Foot Locker format. It plans nearly 50 more conversions in the back half of this fiscal year and expects a closure of 130 Footaction stores.

In EMEA, pent-up demand was sturdy as stores reopened in all countries, delivering double-digit comp growth at Foot Locker Europe. The company’s APAC region saw another strong quarter despite pandemic-related challenges. Management continues to progress on its expansion strategy within Asia.

It rolled out its local Foot Locker website in South Korea, which is likely to boost the company’s omni-channel business in this market. Per management, the company inked a licensing deal to enter the Indonesia market in collaboration with MAP Active — the major brand commerce and athletic retailer in Southeast Asia.

An Insight Into Margins

Foot Locker's gross-margin rate for the reported quarter was 35.1%, up 920 basis points (bps) from the prior-year quarter’s level. The metric improved 500 bps from the second-quarter fiscal 2019 reading.

We note that the merchandise margin increased 870 bps year over year and was up 170 bps from the second-quarter fiscal 2019 levels. Merchandise margin gained from a significant reduction in markdowns. Robust demand and fresh inventory drove lower levels of promotional activity, which in turn, aided gross margin.

The SG&A expense rate was 19.8% of sales, which deleveraged 120 bps year over year but leveraged 240 bps from the second-quarter fiscal 2019 levels.

Other Financial Details

This currently Zacks Rank #3 (Hold) company ended the fiscal second quarter with cash and cash equivalents of $1,845 million, debt of $112 million and shareholders’ equity of $3,341 million. As of Jul 31, 2021, merchandise inventories were $1,081 million, down 9.5% from the prior-year quarter’s levels. On a constant-currency basis, inventory declined 10.4%.

The company bought back 125,000 shares worth $8 million during the fiscal second quarter. In the same period, Foot Locker returned a total of $29 million via its share repurchases and dividends. Recently, management declared a 50% hike in the quarterly dividend. Additionally, the company spent $36 million on store fleet, digital platforms, other infrastructure and supply-chain capabilities.

For fiscal 2021, management expects capital expenditures of approximately $260 million, down slightly from $275 million projected earlier.

It announced the strategic acquisitions of WSS and atmos for a total of $1,110 million. These buyouts are likely to conclude late in the third quarter of the current year. These acquisitions will help the company expand into new markets, customer segments and price points apart from enhancing its relationships with the existing vendor partners and build new relationships.

Foot Locker expects to generate about $10 million annualized cost synergies in fiscal 2022. It projects these deals to be accretive to earnings, which on an annualized basis is estimated to be 44-48 cents in fiscal 2022.

In the reported quarter, Foot Locker opened 16 outlets, remodeled or relocated 23 stores and simultaneously shuttered 57 outlets, mainly in the United States. As of Jul 31, 2021, the company operated 2,911 stores across 27 countries in North America, Europe, Asia, Australia and New Zealand.

Apart from these, there are 134 franchised Foot Locker stores in the Middle East. In fiscal 2021, management projects opening about 120 stores, remodeling or relocating 165 and closing 345. This reflects nearly 190 Footaction stores, planned to be shut down or repositioned in the fiscal year.

Outlook

For fiscal 2021, management is optimistic about delivering a low to mid-teen increase in comp sales. Gross margin is likely to be up 490-510 bps for the current fiscal year from the fiscal 2020 tally, mainly buoyed by a more rational promotional backdrop.

The SG&A expense rate is anticipated to leverage between 40 bps and 60 bps year over year. Adjusted earnings are envisioned in the bracket of $7.00-$7.15 per share. The company delivered earnings per share of $2.81 last fiscal. The Zacks Consensus Estimate for fiscal 2021 earnings currently stands at $5.84, which is likely to see upward revisions in the coming days.

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