Foot Locker's (FL) Q3 Earnings Beat Estimates, Sales up Y/Y
Foot Locker, Inc. FL posted impressive third-quarter fiscal 2021 results, with the top and the bottom line increasing year on year as well as surpassing the Zacks Consensus Estimate. The company delivered its sixth straight earnings beat and a third consecutive sales surprise.
Results benefited from solid demand conditions across markets and product categories. The company also gained from a robust back-to-school season and strong customer relationships. Management highlighted that the company registered growth, despite the current supply chain challenges. Foot Locker completed the acquisition of WSS in the third quarter. Subsequent to the quarter, it closed the atmos transaction as well.
The company updated its fiscal 2021 guidance. Management is cautious regarding supply chain headwinds and expects the same to persist during the fourth quarter.
Shares of Foot Locker fell nearly 12% during the trading hours on Nov 19. The stock has declined 13.6% in the past three months compared with the industry’s fall of 3.5%.
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Q3 Metrics
The athletic shoes and apparel retailer posted adjusted earnings of $1.93 per share, which surpassed the Zacks Consensus Estimate of $1.36. The bottom line increased almost 60% from $1.21 per share earned in the prior-year quarter and 71% from $1.13 a share recorded in third-quarter fiscal 2019.
Total sales of $2,189 million rose 3.9% year over year and topped the consensus estimate of $2,137 million. Excluding the foreign-currency fluctuation impact, total sales rose 3.6%. The top line rose 13.3% from third-quarter fiscal 2019 reading. The top line includes gains worth $56 million from the acquisition of WSS.
Comparable store sales (comps) moved up 2.2% in the quarter. In August, the metric increased low double-digits. In September, the same declined high single digit. In October, comps were up low-single digit.
During the third quarter, 97% of the company’s global store fleet was open, with temporary closures in Australia and New Zealand as well as certain markets in Asia and Germany. The company’s store channel registered comps growth of 4.2% year on year. Store traffic increased nearly 30% year over year.
In the digital channel, sales were down 4.6%, as it lapped strong growth witnessed in the year-ago period. Digital sales penetration rate was 19.8%, down160 basis points (bps) year on year.
In North America, the Kids Foot Locker, Champs Sports and Foot Locker Canada banners performed well and led to low single-digit comp gains. Other North American banners posted comp declines. Foot Locker in the United States was down low single digits, while Eastbay fell high single digits. Footaction, which has been in a wind-down mode, declined more than 20%.
In EMEA, pent-up demand was sturdy as stores reopened in all countries. The region saw strength across apparel, women's footwear and strategic brands like Converse and New Balance. This led to double-digit comp growth at Foot Locker Europe and high-digit comp gain at Sidestep.
The company’s APAC region was down slightly, as it continued to reel under the pandemic-led challenges. Foot Locker Pacific saw low single-digit comp gain, while Foot Locker Asia was down mid-single digits. Management continues to progress with its expansion strategy within Asia.
Foot Locker, Inc. Price, Consensus and EPS Surprise
Foot Locker, Inc. price-consensus-eps-surprise-chart | Foot Locker, Inc. Quote
An Insight Into Margins
Foot Locker's gross-margin rate in the reported quarter was 34.7%, up 380 bps from the prior-year quarter’s level. The metric was driven by robust demand as well as fresh and lean inventory levels, which supported lower levels of promotional activity. Merchandise margin increased 470 bps year over year, driven by a reduction in markdowns.
The SG&A expense rate was 20.9% of sales compared with 20.1% in the prior-year quarter.
Store Update
During the third quarter, the company opened 32 stores and remodeled or relocated 29 stores. It closed 80 stores, including 32 Footaction closures and 18 conversions. It also acquired 93 WSS stores.
As of Oct 30, 2021, the company operated 2,956 stores in 27 countries in North America, Europe, Asia, Australia, and New Zealand. In addition, 136 franchised Foot Locker stores were operating in the Middle East.
For fiscal 2021, management expect to open approximately 144 stores, including eight new WSS stores, remodel or relocate 200 stores and close 370 stores, including about 205 Footaction doors.
Other Financial Details
This Zacks Rank #3 (Hold) company ended the fiscal third quarter with cash and cash equivalents of $1.339 million. Long-term debt and obligations under finance leases debt amounted to $456 million and shareholders’ equity of $3,342 million.
During the quarter, Foot Locker repurchased 2.75 million shares for $129 million. It also paid out a quarterly dividend of 30 cents per share for a total of $30 million.
Management highlighted that the company invested $737 million during the third quarter to complete the acquisition of WSS. After the end of the third quarter, it acquired atmos for $360 million, subject to customary adjustments. These buyouts will help the company to expand in new markets, customer segments and price points. These additions will enhance its relationships with the existing vendor partners and build new relationships.
The company incurred capital expenditures of $50 million in the quarter, bringing the year-to-date total to $137 million. Management expects to invest approximately $240 million in capital expenditures in fiscal 2021, lower than the prior guidance of $260 million due to supply chain challenges.
Outlook
The company expects to gain from the acquisitions of WSS and atmos. Foot Locker expects to keep gaining from strong consumer demand and inventory levels, keeping it well positioned for the holiday season. It is apprehensive about encountering industry-wide supply chain headwinds. This includes port congestions and factory shutdowns, which are likely to dent the company’s fourth-quarter performance and persist in fiscal 2022.
For fiscal 2021, management expects to deliver sales growth in the high-teens bracket, with comp sales in the mid-teens. Gross margin is likely to be up 540-550 bps year on year, driven by a more rational promotional environment. SG&A expenses are expected to leverage between 40-50 bps year over year.
Adjusted earnings are envisioned in the bracket of $7.53-$7.60 per share compared with $7.00-$7.15 anticipated previously. The company delivered earnings per share (EPS) of $2.81 in the last fiscal. The Zacks Consensus Estimate for fiscal 2021 earnings is currently at $6.95.
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