Actions of Foot Locker, Inc. FL gained 7.3% during trading hours on August 20 following the release of strong second quarter FY2021 results. Net income increased year over year and exceeded the estimate of Zacks consensus. The company recorded a fifth consecutive result and a second consecutive sales surprise for the quarter in question.
Results were supported by a strong performance in the women’s and children’s footwear business, and strong demand for apparel and accessories offerings. These factors, along with more limited promotional activity, were responsible for both the better and the worse performance during the quarter.
The strong trends of the first fiscal quarter continued into the second fiscal quarter. The company’s FLX membership program continues to gain traction as it finished the fiscal second quarter with more than 25 million members compared to 20 million members at the end of the previous quarter. The company’s product pipeline with strength in the basketball clothing and category continues to be impressive.
It has strengthened both in stores and in digital channels. Its digital sales penetration rate was 20.1% in the second fiscal quarter, well above 2019 levels and this trend is expected to continue. For the current quarter, the Company’s global fleet remained open for nearly 94% of possible operating days with temporary shutdowns in Canada, select markets in Asia and Germany.
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Over the past six months, the company’s shares have gained 6.5% from the industrydecrease of 9.8%.
The footwear and sportswear retailer posted adjusted earnings of $ 2.21 per share, beating Zacks’ consensus estimate of $ 1.08. Net income improved above 200% from the 71 cents per share earned in the prior year quarter and 66 cents per share recorded in the second quarter of fiscal 2019.
Total sales of $ 2,275 million increased 9.5% year-over-year and exceeded the consensus estimate of $ 2,111 million. Excluding the effect of foreign currency fluctuations, total sales increased by 7.3%. Revenue also jumped 28.2% from the second quarter of fiscal 2019 reading.
Comparable store (comps) sales increased 6.9% in the quarter. In May, the metric was above 50%. However, in June, the same numbers dropped to single digits. In July lineup was down single-digit with dynamics improving as it progressed through the month.
Foot Locker, Inc. Price, Consensus, and Surprise EPS
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 posted double-digit earnings gains. Management has made significant progress in its strategy to transform its portfolio and fleet in North America for some time now. She has decided to close her Footaction banner by the end of fiscal 2022 while focusing on the basics.
The company completed its first Footaction store conversion and reopened as a Foot Locker format. It expects nearly 50 additional conversions in the second half of this fiscal year and expects 130 Footaction stores to close.
In EMEA, pent-up demand was strong with the reopening of stores in all countries, driving double-digit growth for Foot Locker Europe. The company’s APAC region had another strong quarter despite challenges from the pandemic. Management continues to make progress with its expansion strategy in Asia.
It has deployed its local Foot Locker website in South Korea, which is expected to boost the company’s omnichannel activity in that market. According to management, the company signed a licensing agreement to enter the Indonesian market in collaboration with MAP Active, the leading brand and sports retailer in Southeast Asia.
An overview of the margins
Foot Locker’s gross margin for the quarter presented was 35.1%, up 920 basis points (bps) from the level in the quarter a year earlier. The measure improved by 500 basis points from the second quarter of fiscal 2019 reading.
We note that the merchandise margin increased 870 basis points year-on-year and 170 basis points from levels in the second quarter of fiscal 2019. Merchandise margin gained through significant reduction in markdowns. Robust demand and fresh inventory resulted in lower levels of promotional activity, which in turn contributed to the gross margin.
The general and administrative expense rate was 19.8% of sales, which translated into a deleveraging of 120 basis points year-on-year, but 240 basis points from levels in the second quarter of fiscal 2019.
Other financial details
This company currently Zacks Rank # 3 (Hold) ended the second fiscal quarter with cash and cash equivalents of $ 1,845 million, debt of $ 112 million and shareholders’ equity of $ 3,341 million. As of July 31, 2021, merchandise inventories were $ 1,081 million, down 9.5% from levels in the previous year quarter. At constant exchange rates, inventories fell 10.4%.
The company repurchased 125,000 shares worth $ 8 million during the second fiscal quarter. During the same period, Foot Locker returned a total of $ 29 million through its share buybacks and dividends. Recently, management declared a 50% increase in the quarterly dividend. Additionally, the company spent $ 36 million on store fleets, digital platforms, other infrastructure and supply chain capabilities.
For fiscal 2021, management is forecasting capital expenditures of approximately $ 260 million, down slightly from the $ 275 million projected earlier.
He announced the strategic acquisitions of WSS and atmos for a total of $ 1,110 million. These buybacks are expected to close at the end of the third quarter of the current year. These acquisitions will help the company expand into new markets, customer segments and price points, in addition to improving relationships with existing supplier partners and forging new relationships.
Foot Locker expects to generate approximately $ 10 million in annualized cost synergies in fiscal 2022. It expects these agreements to be accretive to earnings, which, on an annualized basis, are estimated at 44-48 cents for fiscal year 2022.
During the current quarter, Foot Locker opened 16 outlets, remodeled or relocated 23 stores and closed 57 outlets simultaneously, primarily in the United States. As of July 31, 2021, the Company operated 2,911 stores in 27 countries in North America, Europe, Asia, Australia and New Zealand.
Apart from these, there are 134 Foot Locker franchise stores in the Middle East. During fiscal year 2021, management plans to open approximately 120 stores, renovate or relocate 165 and close 345. This represents nearly 190 Footaction stores, the closure or repositioning of which is scheduled for during the exercise.
For fiscal 2021, management is optimistic about the increase in sales of comp. The gross margin is expected to increase by 490 to 510 basis points for the current fiscal year compared to the full year 2020 count, mainly due to a more rational promotional environment.
The SG&A rate is expected to leverage between 40 and 60 basis points year over year. Adjusted earnings are expected to be in the range of $ 7.00 to $ 7.15 per share. The company achieved earnings per share of $ 2.81 last year. Zacks’ consensus estimate for FY2021 earnings currently stands at $ 5.84, which is expected to be revised upwards in the coming days.
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