Friday, May 24, 2013

Foot Locker (FL) - Earnings 5/24

Foot Locker reported earnings on 5/24 and beat estimates in both revenue and EPS.  They report Q1 EPS of $0.91 which beat estimates of $0.88 and represented a growth from Q1 2012 of 10% representing the highest quarterly profit ever achieved from Foot Locker Inc. While a revenue growth of 3.8% to $1.64B was in line with estimates of $1.63B. Foot Locker is down 4.99% on the basis of comparable store sales being "flat" this month as well as skepticism moving forward for the company.

Seeing big gains in the Direct-to-Customer business which were up 18.2% in comparable sales while stores were + or - 5% in gains except for the Kids Foot Locker with gains of almost 20% this quarter.  Apparel has seen a mid-single-digit increase in sales overall with a strong double digit gain in the digital sales all across men, women and kids.  Internationally, apparel sales were down however with an improvement in margins.

Store openings and closings had cancelled each other out with an overall slight contraction of store numbers at 3,321 which is down 14 stores from the end of the year.  Holding a strong gross margin at 34.2% has shown an increase of around 20 basis points for the company. Receiving a slightly better tax rate along with an overall lower growth in costs than seen in sales, has led Foot Locker to achieve their highest quarterly earnings ever as stated before.

Ending with $1.1B in cash on the balance sheet as the first quarter is usually the peak of their cash flows seasonally and declining here going forward until the year end holidays, we will see this years cash balance go towards the acquisition of Runners Point Group (RPG) and also a $600 million share buyback program beginning in Q2.  Overall they are expecting a margin improvement of 20 to 30 bps due to sales growth alone

RPG is company that is based out Europe, mainly in Germany.  With this acquisition, Foot Lockers main exposure in Europe will change form Italy over to Germany which I feel is a huge boost for outlook on their European segment.  I feel this is due to the overall view on Europe and Germany being seen as a much stronger area of Europe compared to Italy currently.  Having an established management and store line, as stated by FL's CEO Kenneth Hicks, it isn't a company that is broken and needs to be fixed but rather one that they can expand off of the solid foundation set by the company already.

Lady Foot Locker has put a significant strain on the company and they have been rebuilding this segment to gain market share of 20-30 year old actively athletic women.  They have seen increase in sales of remodeled test stores and doors of Lady Foot Locker which shows they are stepping foot in the right direction and this can be a big booster to their sales going forward as it is in a depressed state currently.

So with the changes and revamps of current segments of Foot Locker, their acquisition of Runners Point Group, and their greater exposure to digital sales, I see Foot Locker as a strong player going forward in the consumer industry however there are certain risks as we see them take on the acquisition, the remodeling of Lady Foot Locker and Q2 sales being high enough to counter balance the usual Q3 slow down.  A position in Foot Locker is still seen as being justifiable but will be monitored stringently.

-Michael R. Rodrigues

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