Foot Locker (NYSE:FL) Poised for Sustainable Growth as Lace Up Plan Gains Traction

Foot Locker, Inc. (NYSE:FL) is a leading specialty athletic retailer that has been navigating a dynamic consumer environment with its strategic Lace Up plan. The company's first quarter 2024 results demonstrate the progress it is making, with better-than-expected non-GAAP earnings per share and comparable sales performance in line with guidance.

Financials

In the first quarter of 2024, Foot Locker reported revenue of $1,879 million, a 2.8% decrease compared to the prior-year period. This decline was driven by a 1.8% decrease in comparable sales, which was in line with the company's guidance of flat to low single-digit decline. The Champs Sports repositioning represented a 220 basis point headwind to the comparable sales performance. Foot Locker's Foot Locker and Kids Foot Locker banners reported a 1.1% increase in global comparable sales.

On the profitability front, Foot Locker's gross margin rate declined 120 basis points to 28.8% in the first quarter. This was primarily due to a 140 basis point decrease in the merchandise margin rate, partially offset by 20 basis points of leverage in occupancy and buyers' compensation expenses. The company's non-GAAP earnings per share came in at $0.22, reflecting disciplined expense management and some favorable expense timing shifts from the first quarter into the second quarter.

Outlook

For the full year 2024, Foot Locker is reiterating its non-GAAP earnings per share guidance of $1.50 to $1.70. The company expects full-year comparable sales growth of 1% to 3% and gross margin expansion of 210 to 230 basis points to a rate of 29.8% to 30%. This outlook assumes ongoing challenges with the consumer and macroeconomic backdrop, as the company anticipates its customers will be selective with their discretionary spending amid persistent inflation, reduced savings levels, and higher interest rates.

Business Overview

Foot Locker's strategic Lace Up plan is focused on four key imperatives: expand sneaker culture, power up the portfolio, deepen customer relationships, and be best-in-class omni. The company is making progress on each of these fronts, which is evident in its first quarter performance and outlook.

In the first quarter, Foot Locker continued to enhance its brand partner relationships, leading with customer insights and collaborating on multi-year growth plans. The company is also seeing positive momentum in its basketball, running, and lifestyle categories, with strong performance from key franchises such as Nike's Sabrina 1, Ja 1, and Book 1, as well as Jordan's Tatum 2 and Adidas' exclusive AE 1.

Real Estate Transformation

Foot Locker's real estate transformation efforts are also gaining traction, with the successful unveiling of its reinvented retail concept at Willowbrook Mall in New Jersey. This immersive store experience celebrates the Foot Locker brand and has received positive feedback from both customers and brand partners. The company plans to launch four additional locations in 2024, including in New York City, Melbourne, Delhi, and Paris.

In addition to the new retail concept, Foot Locker is executing a meaningful store refresh program, aligning with the design principles of the new format. The company completed 13 refreshes in the first quarter, on top of the 100 executed in the back half of 2023, and remains committed to refreshing approximately two-thirds of its global Foot Locker and Kids Foot Locker doors by the end of 2025.

Customer Relationships and Digital Initiatives

Foot Locker is also making progress in deepening its customer relationships, with 26% of sales in the first quarter coming through its current loyalty program, up 200 basis points year-over-year. The company is preparing to relaunch its FLX Rewards program in the United States in the second quarter, following a successful pilot in Canada. The enhanced program is designed to drive increased frequency and share of wallet among Foot Locker's customers.

On the digital front, Foot Locker's e-commerce penetration increased to 17.1% in the first quarter, up 80 basis points year-over-year. The company is focused on improving the customer experience through elevated site content, enhanced navigation and search capabilities, and a full product detail page redesign. Foot Locker is also on track to roll out a new mobile app later this year, which will provide a faster, more modern shopping experience and serve as a hub for the new loyalty program.

Geographic Performance

Geographically, Foot Locker's performance was mixed in the first quarter. North America comparable sales decreased 2.5%, including a 320 basis point negative impact from the Champs Sports repositioning. The Foot Locker and Kids Foot Locker banners in North America reported a 0.8% and 6.4% increase in comparable sales, respectively. In Europe, Foot Locker's comparable sales increased 1.6%, while in Asia Pacific, the company's comparable sales declined 5.5%.

Recent Developments

Looking ahead, Foot Locker expects to see continued momentum in the second quarter, with a flat to slightly positive comparable sales performance. The company anticipates gross margin to be approximately flat year-over-year in the second quarter, including a $15 million, or $0.10 per share, impact from the initial FLX loyalty rewards transition.

Conclusion

Foot Locker's strong brand partnerships, strategic real estate initiatives, enhanced customer engagement, and digital capabilities position the company well to navigate the current consumer environment and deliver sustainable, profitable growth. The company's Lace Up plan is gaining traction, and Foot Locker remains committed to its long-term EBIT margin target of 8.5% to 9% by 2028.