Foot Locker falls short of earnings estimates

Dive Brief:

Foot Locker missed first quarter earnings estimates Friday, sending shares down 10% in premarket trading, and also impacting its key suppliers, Nike and Adidas. The footwear retailer reported net income of $172 million, up from $165 million a year ago, according to a company press release.
Comp sales increased 4.6%, but fell short of analyst expectations for 5.6%. Total first quarter sales at the retailer rose 2.6% to $2.08 billion, up from $2.03 billion in the year-ago quarter. Analysts had expected $2.12 billion, according to MarketWatch.
Gross margin at the athletics retailer was 33.2%, an improvement of 30 basis points. Despite missing earnings, Foot Locker reiterated its previous full-year guidance, except for earnings per share based on a share repurchase. The retailer's long-term debt was $123 million, down from $125 million a year ago, but the company had $1.1 billlion in cash, an increase of $97 million from the end of Q1 last year.

Dive Insight:

Foot Locker executives were focused on new products from suppliers and its own efforts to spice up the shopping experience on a call with analysts Friday, highlighting a Game of Thrones collection and a Marvel collection that capitalized on popular culture in the quarter.

Nevertheless, the missed expectations made some analysts nervous about performance in Q2 and beyond.

"Risks to the attainment of our price target and rating include weakening consumer demand for athletic footwear and apparel due [to] competition, yielding a negative impact on sales and margin growth," Wedbush analysts wrote in comments emailed to Retail Dive. "Weakening global economies could also negatively impact sales [and] earning particularly outside the US."

It wasn't all bleak, though. Foot Locker's increase in comps in the quarter was driven largely by direct-to-consumer sales, according to Lauren Peters, chief financial officer at Foot Locker. Store comps were up 2.9%, while direct-to-customer sales notched a 14.8% same-store sales increase. As a percent of total sales, direct to consumer made up 15.4%, compared to 13.9% a year ago, Peters said.

The retailer is also focused on changes to its brick-and-mortar strategy, including through the opening of 14 new stores in the quarter, two of which followed its power store model. CEO Dick Johnson expressed confidence in the power store model going forward, and reiterated plans for the company to open more than a dozen over 2019. Total, the company ended the quarter with 3,201 stores, after 13 remodels or relocations, and 34 closed stores.

Executives didn't give much color on the company's recent investment-heavy strategy, which included a $12 million investment in Rockets of Awesome, $3 million in Super Heroic and $100 million in GOAT Group, among others. Johnson indicated that the team was pleased with their progress, but declined to give any details on what might come out of the partnerships.

"As we look to the rest of 2019, we are optimistic," Johnson said, citing compelling products from Nike, Adidas and other suppliers coming down the pipeline. The retailer is also expecting to roll out its FXL membership program further in 2019, which is currently live at Lady Foot Locker and in the Netherlands.

Foot Locker, along with over 170 brands including Nike and Adidas, recently signed a letter asking President Donald Trump for footwear to be taken off the list of proposed tariffs, calling the duties potentially "catastrophic" for the industry.