Restoring the Foot Locker

NEW YORK — Matthew Serra is a bit bleary-eyed.

The chairman, president and CEO of $5.4 billion Foot Locker Inc. has just returned from a self-described “massive” mid-June meeting at the Beaverton, Ore., headquarters of Nike Inc., the firm’s largest supplier.

But despite his jet lag, Serra — who meets with Nike on a quarterly basis — is eager to talk about the new initiatives at Foot Locker.

Serra is determined to “right the ship,” after a challenging time for the giant athletic retailer. “[This is the year to] get our business back on track and to work on updating and making our stores look more exciting,” Serra told Footwear News during an exclusive interview at the firm’s 34th Street headquarters here.

As with most of the retail sector of late, the 3,800-store company has seen lagging profits and sales. In the first quarter, net income dropped 82 percent to $3 million, while sales were flat at $1.31 billion and comparable-store sales fell 2.9 percent. The firm cited, in part, costs related to its store renovation strategy, along with the tough economic environment. Still, Foot Locker ended the quarter with $283 million in cash, net of debt.

The company is taking advantage of that cash on hand to upgrade stores —a move Serra is counting on to lead the chain’s turnaround. Globally, across its retail divisions, Foot Locker is fitting stores with flat-screen TVs, ceramic floor tiles, brighter lighting, shoe towers and “floating walls” for display. About 200 remodels and relocations are on tap for the year, with the emphasis on the firm’s flagship division, in addition to 60 new store openings and 140 store closures.

“Our principal goal this year is to get our stores renovated. It’s going to be a two-year process,” Serra said, adding, “We’ve got the capital [to do so].”

Another priority for Foot Locker has been to improve in-store presentation of skate product, a category that shows growth potential. The firm’s top skate brands — Converse, Nike, Zoo York, Ecco, Adidas and the recently added Nyx, a Nike skate collection placed in Champs units — make up an “increasingly important” part of Foot Locker’s sales, particularly in suburban areas, Serra said. (He declined to break out the percentage of sales skate represents.) At the end of last month, Foot Locker launched dedicated skate shoe presentations at 600 to 700 Foot Locker stores and at all Champs locations.

“Skate is getting very hot. I don’t think it’s a fly-by-night [category]. Skate is a lifestyle. It’s really the foundation of the action-sports business, and it’s not just confined to coastal stores in California any longer,” Serra said.

Here, the CEO weighs in on the importance of mining growth opportunities, the tough economy, the upcoming back-to-school season and the firm’s acquisition strategy.

FN: Mall traffic has deteriorated and the economic outlook is dim. What’s your take?

MS: It’s difficult to quantify, but [mall traffic] is down. [Still], our whole business is improving, and that’s because we’re doing a better job than we were last year with the merchandising. The economy is still going to be challenging. The country is clearly in an oil/energy crisis, and that’s going to be the major theme of the presidential election: How we are going to get this energy policy in place and under control? Our average customer in most of the divisions is 14 to 18 years old, but they get their money from mommy and daddy. … With the current turmoil in the energy markets, the financial markets and consumer sentiment, I would be shocked if the economy came back before mid- to late 2009.

FN: In the last year, Foot Locker has worked through an excess inventory position and ended the most recent quarter with $100 million less in surplus merchandise year-over-year. How do you continue to balance inventory management with the back-to-school season coming up?

MS: At the end of the day, 20 to 25 percent of your inventory can represent 70 to 75 percent of your sales. That is the art of retailing. How do you get the right product, the right quantities and the right locations and get the most productivity out of the inventory. When you happen to be a large company like ours, with 3,800 locations worldwide, quite frankly, what sells in New Orleans does not sell in Portland, Ore. There’s a commonality in many of the basic merchandise styles, but there is clearly differentiation. … So our job as merchants with a strong planning and allocation organization is to figure all that out. That’s thankfully what we’re back to doing instead of just trying to mark down merchandise and get the inventories back in line.

FN: What’s your outlook for back-to-school?

MS: The economy still remains very challenging. While saying that, there is an opportunity for back-to-school to be pretty good for Foot Locker, particularly in the U.S., for several reasons. Last year, [we had] bad inventory [problems], obviously selling inventory at very low prices to get rid of it. This year, there will hopefully be very full-price [selling]. And there are a lot of very new, exciting products.

FN: Such as?

MS: We’re getting into the skate business aggressively, and by the end of [June], we will have in all of our Champs stores and in at least 600 Foot Locker stores full skate presentations.

FN: The company didn’t have separate skate presentations before?

MS: We haven’t pulled [skate product] together before and presented it in the important way that it needs to be. Skate is getting very hot. I don’t think it’s a fly-by-night [category]. It’s really the foundation of the action-sports business, and it’s not just confined to coastal stores in California any longer. You’re seeing kids with skateboards all over inner cities in America. We expect to be the biggest player in the industry. We probably are with the brands that we already carry, if not the largest retailer of skate products already. We’re putting in many new programs and really going after it aggressively.

FN: Are you going to make promotions a big part of your back-to-school strategy, given the economy and many consumers’ tightened budgets?

MS: We’re hoping that back-to-school will be a very regular-price business this year. We certainly have cleaned up our inventories, and we don’t see the necessity to promote aggressively.

FN: What new products are you offering this season?

MS: We’re carrying Pastry. It’s a women’s line, kind of a little urban, but it’s a departure — very colorful, interesting product. MBT is selling extremely well at Lady Foot Locker stores. They’re terrific. Fit Flops are exploding in Lady Foot Locker — we have an exclusive in the mall. When you switch to apparel, the fastest-growing area right now is mixed martial arts, and we have a Tapout exclusive in the mall. With Tapout, we’re doing a very big job with Champs, and that’s going to go into a lot of Foot Lockers [in June and July].

FN: The big brands have struggled to absorb increasingly higher production costs. How is that affecting Foot Locker?

MS: Prices are up, but not as much as everyone believes. [Prices] had been flat for a long time, and we’re not experiencing any price resistance [from consumers] on the right product.

FN: So are you increasing prices?

MS: The vendors are increasing [prices]. When you get into a business like ours, where more than one-third of our product is $100 and higher, when the shoes are $120 and go to $125, I don’t think the customer [who can afford] that [price] point cares.

FN: What has spurred Foot Locker’s recent round of store renovations?

MS: We took a look at our portfolio last year and made a decision that, particularly in the U.S., while we would continue to open new stores, we needed to prune the unproductive stores. And at the same time, we felt there was a need to do the second round of updating. Ten years ago, the stores were in very bad shape, and worldwide we had renovated them to the new look to the 90 percent level by the end of last year. And now it’s time to go to the next generation.

FN: What do the renovated stores look like?

MS: The next generation is more contemporary: ceramic tile floors, bright white lights, floating shoe walls, limited-edition walls. We felt it was time to freshen stores up. And we have the capital and cash necessary to accomplish that. We needed to take a respite this year on expansion. On our first-quarter conference call, I said this was the year to right the ship, get our business back on track and to work on updating and making our stores look more exciting. And very important at our flagship edition is putting the “cool” back in Foot Locker. I’m pleased to say it’s working.

FN: What’s the latest update on House of Hoops, which you’ve said could potentially support as many as 50 stores?

MS: The store on 125th Street in Harlem is doing well. Nike has really supported us. We’re planning to open between four and six more stores this year. We expect to open one in Chicago, one in Texas and possibly [in] Las Vegas. We expect to increase sharply the [existing] House of Hoops business in all the Foot Locker stores, and you’ll be able to identify key trends in basketball faster. While the basketball business [overall] is not good in America, our basketball business remains good. It’s not a secret we have a very large basketball business, and worldwide we are approximately a billion-dollar basketball business. So we’re clearly the leader.

FN: How far can basketball sales go?

MS: It’s too premature [to speculate]. We can grow, particularly with the House of Hoops project, organically, and that means with our existing fleet, at least 3 to 6 percent a year. I’m being conservative with that number, and that [growth projection] is big on that kind of base. And when I’m saying a billion dollars, that includes apparel, [though] the lion’s share is footwear.

FN: How is marquee product performing?

MS: Our business is very strong within marquee and growing. Our running business in the U.S. is strong, [but] Europe is challenging.

FN: Is that because Europeans now prefer lower-profile athletic looks as opposed to marquee?

MS: Yes. The introduction of low-profile merchandise several years ago, while it was an interesting and exciting new product, it certainly didn’t serve us well. In Europe, we were selling high-priced technical footwear for 100 to 160 euros. Now we’re selling a lot of product at 80 to 100 euros. So you literally have to sell 50 to 60 percent more in units just to keep even. We do see the high-end marquee product coming back in Europe — not as quickly as we’d like, but it’s there. We’ve seen some good trends lately. But all that has hurt the European business, and our business in particular, because that’s where we really plan the exciting, technical, high-end marquee merchandise. We’ve adjusted our assortments to add more low-profile, but with more exclusive — and we think more interesting — special makeups from our key vendors.

FN: How are company sales performing elsewhere internationally?

MS: International business is not a disaster. Asia Pacific is good. It’s Europe where we’re having difficulty. Canada and Australia are where we’re doing very nicely.

FN: How will Foot Locker capitalize on the hype surrounding the start of the Olympics next month?

MS: An Olympic year is always good for the athletic footwear industry, and we’re doing a considerable amount of marketing around the Olympics in performance product in the month of August.

FN: What about in the U.S. and Europe?

MS: Yes. It’s certainly not going to hurt business.

FN: Most agree that for athletic sales to improve, there needs to be new, exciting product. What’s going to be the next cool technical athletic shoe?

MS: One of the most important thrusts is clearly skate product. We’ve seen a lot of new technology from the big guys — Nike, Adidas — and particularly in basketball product. Now you have Under Armour coming out with running product, and we believe Under Armour has a very strong connection with the [target] kid. All indications are that it should be a highly successful launch. We’ll have them. I believe it’s [launching] Jan. 31, 2009.

FN: Foot Locker has been updating its branded apparel program, as well. What’s the news there?

MS: Branded apparel in the athletic specialty channel has been tough for a couple of years, but it’s [a question of] what comes first, the chicken or the egg? We [recently] took a step back too aggressively and didn’t maintain our [apparel] business with key partners. Nike and Adidas in particular are putting a lot of merchandise back in, and we’re seeing a resurgence in nylon, which is very important because when the branded apparel business was good, that was the foundation. It’s been very conducive to workout wear.

FN: What’s your percentage of apparel verses footwear sales?

MS: Apparel and accessories are around 20 to 22 percent globally.

FN: Do you have any acquisitions in the works?

MS: We think there are some opportunities out there, but we will always be very cautious and make sure we’re both strategic and accretive [to earnings]. … We continue to be shown various acquisition opportunities, but our primary near-term focus is to increase profitability in our existing businesses. We’re only interested in [acquiring] compatible businesses.

FN: Would you ever consider buying a vendor?

MS: It’s possible, as long as it’s in the athletic zone.

FN: Are you still interested in acquiring Genesco Inc.?

MS: I really don’t think it would be appropriate for me to comment on it. There are legal issues, and there’s still some minor litigation [surrounding Genesco’s failure to merge with Finish Line Inc. earlier this year].

FN: On the succession-planning front, are you thinking about retirement at all?

MS: We have a succession plan. I really don’t want to get into that. I have about two years left on my contract. I’m in good shape for an old guy, so we’ll see.


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