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Foot Locker: Mary Dillon Arrives at the Starting Line

Thomas Paulson
Aug 26, 2022
Foot Locker: Mary Dillon Arrives at the Starting Line

Mary Dillon and Foot Locker surprised many with Dillon's appointment as the retailer's new CEO, and thus, extending successful career following her most recent role as Ulta's CEO (and other roles at Pepsi, McDonalds, and U.S. Cellular). At Ulta, some of Dillon's key accomplishments were to expand brand partnerships with previously department store-only prestige luxury brands, being on top of large consumer trends, building a robust supply chain, and expanding e-commerce capabilities. In our view, these talents and skills will be on-point for Foot Locker, as will her reputation as a strong executor. For these reasons, there is renewed optimism among industry experts and Wall Street analysts. Foot Locker also reported a decent 2Q22 results, albeit against lowered expectations.

  • Comparable-store sales fell -10%. However, non-Nike sales were up high-single-digits, apparel and accessories were down only low-single-digits, and store traffic was up low-double-digits. In the U.S., comparable-store sales were down low-double-digits and Champs was down high-teens as the conversion rate fell. Compared to 2019, brick-and-mortar traffic is down, indicating the conversion is “meaningfully higher.”
  • Consumer demand for the quarter mirrored what other retailers have described, with current CEO Dick Johnson saying, “After a strong start in May, we saw trends slow in June, which continued through mid-July. As trends soften, the promotional environment has become more intense, especially in apparel, but also in footwear. In the back half of July, trends started to pick up meaningfully, especially in our earliest back-to-school markets. As we look to 3Q22, we are excited about back-to-school and the strong start so far as well as the energy we are bringing to the market this fall and holiday seasons."
  • CFO Andrew Page shared, "Although more dramatic in our lower-income customer base, the softening was across the board. That more pronounced softening in our lower-income customer base was a trend we saw in our core business as well as our customer segments at WSS. That trend continued into the first half of July. But the back half of July began to improve, particularly in the early back-to-school markets."
  • Johnson called out success in diversifying the brands at Foot Locker with Converse and Vans sales up 20%, and Brooks, ASICS, New Balance and Crocs all up over 50%. Other brands expanding at Foot Locker include Puma, Under Armour, Addidas, Hoka, and On.
  • Trailing-twelve-month (TTM) sales per square foot on a global basis for physical retail fell $20 to $890. That compares to $884 in 2Q19. Over the next year, TTM sales are likely to decline at a low-single-digit rate.
  • 2021 was a record period of profitability. As such, a more illustrative comparison is to 2019; gross margin rate of 31.7% was up from 30.1% and EBITDA margin of 10.1% was up from 8.3%. Looking forward to 2H22, EBITDA margin will come down some due to fixed cost deleverage.
  • TTM EBITDA and free cash flow of $997M and $535 compares to $900M and $750M in 2Q19. Over the next year, EBITDA is likely to come down modestly, whereas lower inventories will result in an improvement in FCF.
  • 25 new Foot Locker Community and Power Stores were opened (globally) during the quarter taking the total to 100. Eight US Foot Locker locations were added in the period, and four WSS stores. 80 new WSS stores are planned for 2023 with the focus on expanding in Texas and eastward, especially in Florida. 190 stores are slated for closure on a global basis.
  • The new large-format Champs Homefield Store (35K square feet) outside of Miami was characterized as “performing well.” As shown in Placer.ai, this location is matching the nearby Dick’s Sporting Goods in visits and trade area (or draw), but the dwell time (i.e., engagement) is more than the Dick’s location. In terms of who is shopping the two locations, the most distinct difference is in ethnicity as shown below. EVP Frank Bracken said of the Homefield store, "The consumer reception so far has been very strong, with both conversion and average ticket well above the company average and increasing sales momentum within our performance-based assortment, led by performance running, performance basketball and cleated footwear. We are pleased with the results so far and continue to evaluate the potential of the concept to serve sport-inspired consumers and elevate innovation and storytelling for our industry."

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Thomas Paulson

Director of Research and Business Development, Placer.ai

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more.

He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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