Foot Locker's Slam Dunk Quarter
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Foot Locker (NYSE: FL) is a stock that has seen its ups and downs, similar to those of other fashion retailers. The company's most recent selloff may well prove to have been excessive, though, in light of the company's October earnings announcement. Share net tallied $0.63, excluding a tax benefit, up 47% from the prior year's result. The news sent the stock price on a rebound. As additional investors are made aware of the solid performance, its uphill climb could possibly persist.
Comparable-store sales increased an outstanding 10% year over year in the period, probably somewhat reflecting new product timing, but nonetheless it was a sizable gain. In fact, double-digit percentage comps were achieved in most store concepts, particularly domestic Foot Locker, Champs Sports, and Footaction. Notably, the “Kids” division posted a better-than-20% advance. However, Lady’s Foot Locker has not fared as well, recording negative comps. Back-to-school sales were strong, though there was a bit of a lull in October. This may explain the company’s outlook for a bit slower mid-single-digit same-store sales growth for the gift giving season.
Basketball sneakers sponsored by players, particularly the iconic Michael Jordan, fueled sales improvements in footwear. Sales of running shoes showed only modest growth, limited a bit by a transition to court styles in Europe. Accessories also sold well; those complementary items such as socks and hats may be drawing crowds.
In contrast, cash registers were also ringing at another sports-related retailer: Hibbett Sports (NASDAQ: HIBB), a company that reported 6% comps and strong earnings, also citing youth consumers. Hibbett is a sporting goods outlet based in Alabama that continues to extend its presence. Management was optimistic enough to raise its 2013 earnings guidance, as it too likes the trends in apparel and footwear. Still, the stock’s upside potential is restrained at the current quotation, as evidenced by the market’s lack of a positive reaction.
A key factor in Foot Locker’s excellent quarter was higher sales per square foot. Keeping the store counts essentially flat or lower at each unit besides the international ones, it achieved improved returns-on-invested-capital and inventory turns. Closings of less productive units and relocations are partially attributable, while management also mentioned investments in store personnel. As a result, the gross margin rose slightly, despite reduced merchandise margins.
Foot Locker is not sacrificing its ubiquitous store base much to boost profitability. One might think with all of its athletic store subsidiaries it is prone to cannibalization at this juncture. This brings us to a third retailer that posted solid results this week: Gap (NYSE: GPS). The owner of Gap, Banana Republic, and Old Navy had a comparable-store sales gain of 6%, supporting an earnings jump to $0.63, from $0.38. As for Gap’s store base, square footage is on tap to decline 1% this year, while it “optimizes square footage in North America.” Gap shares are reasonably priced and worth consideration at this time.
Foot Locker is planning to up capital spending over the next year or two, and will be testing prototype stores during the holiday season. The remodelings at Champs, Foot Locker, and Kids FL are underway. It is also aiming to shore up concerns at Lady FL, and several such initiatives are planned. Be aware of the ongoing style shift towards hoops shoes, as FL could further capitalize.
In sum, this stock is potentially a near-term gem, but anticipate volatility over the long run.
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