New CEO has laid out a sensible strategy, but progress is difficult to see in such a challenging economic environment
By guest author Jinjoo Lee from the Wall Street Journal.
May 19, 2023
Foot Locker FL -27.24%decrease; red down pointing triangle unveiled its so-called “lace-up” strategy two months ago. But with its lower-income customers feeling so stretched, it is easy to slip up.
The retailer on Friday said comparable-store sales declined 9.1% in its quarter ended April 29, worse than the 7.4% decline Wall Street expected and sending its stock crashing. Net income of USD 36 million was around half of what analysts expected. Selling conditions were difficult enough that the company now expects sales to be down 6.5% to 8% this fiscal year–markedly worse than the prior guidance of a 3.5 % to 5.5 % decline. It also knocked down annual earnings per share expectations to USD 2 to USD 2.25 a share, more than USD 1 below its prior guidance.
The disappointing near-term outlook certainly takes some sheen off the sensible strategy that Foot Locker’s new chief executive officer, Mary Dillon, laid out in March. Dillon, under whose tenure Ulta Beauty’s market capitalization nearly tripled, set out to simplify the business—shutting down laggard banners such as Eastbay, Footaction and underperforming mall-based stores. She also sought to reduce dependence on Nike, which itself is pivoting to direct selling. The selloff on Friday completely erased the share price gains seen since Dillon was named CEO last August.
To be sure, the retailer is making clear strides on some of its goals. Its real estate optimization plan is well under way: The company opened or converted 11 stores globally last quarter and closed 35 underperforming ones. Off-mall now accounts for 35% of North American square footage, up from 31% a year earlier. Its new format stores and off-mall stores are outperforming the total fleet–a good initial indicator. Additionally, non-Nike brands came to account for about 35% of sales last quarter, up from 33% a year earlier. That takes it one step closer to Foot Locker’s 2026 goal of making 40% of its sales through non-Nike brands. Sales of New Balance products, for example, nearly doubled last quarter and the retailer is seeing good momentum in buzzy performance footwear brands such as On and Hoka.
Still, consumer weakness makes it tricky for Foot Locker to showcase the fruits of its strategy. While the company did stress that 2023 would be a reset year, disappointing results were a reminder of how challenging it is to sell discretionary products—especially if the target consumers are lower income.
Dillon said on Friday’s earnings call that consumer demand has weakened since the company’s investor day two months ago, especially with smaller tax refunds. Inflation, while abating, is still high and consumers’ higher gas, food and rent bills are affecting their ability to spend on discretionary goods, she said, also noting that the company is seeing increasing usage of credit. The company confirmed during the call that its goal of reaching USD 9.5 billion of annual revenue and 8.5% to 9% of operating margins by 2026 will probably take longer.
The new boss still has a solid road map in place. Economic stumbling blocks will just make Foot Locker’s journey a slow and painful one.
Dillon said on Friday’s earnings call that consumer demand has weakened since the company’s investor day two months ago, especially with smaller tax refunds. Inflation, while abating, is still high and consumers’ higher gas, food and rent bills are affecting their ability to spend on discretionary goods, she said, also noting that the company is seeing increasing usage of credit. The company confirmed during the call that its goal of reaching USD 9.5 billion of annual revenue and 8.5% to 9% of operating margins by 2026 will probably take longer.
The new boss still has a solid road map in place. Economic stumbling blocks will just make Foot Locker’s journey a slow and painful one.
Appeared in the May 20, 2023, print edition as ‘Foot Locker Slips Up, Sticks With Game Plan’.