Foot Locker is firing on many cylinders, said chairman and CEO Dick Johnson today.
“The team performed well, we’ve got great product in the marketplace, we had our stores open 94% percent of the days, digital connectivity with our consumers is at a high level and we brought more members into FLX,” Johnson told FN.
Handily beating analyst expectations, Foot Locker reported Q2 net income of $430 million for the 13 weeks ended July 31. The earnings trumped the same period last year, which saw earnings of $45 million, as well as the $60 million it earned in Q2 2019. Also, the company reported a total sales increase of 9.5% to $2.3 million, compared to its $2.1 million in sales during the same period last year.
Following today’s earnings call, Johnson shared insights on the impressive quarter to FN and what will drive business in the back half of the year.
Despite COVID, you really delivered in the quarter. Did it surprise you how well you did?
Dick Johnson: “It doesn’t surprise me. Our team is built to perform and they really work hard to offset things like COVID that can be seen by some of the headwind. The results are the byproduct of really great work and great effort that goes into the planning, and ultimately the execution across so many different phases of our business.”
How has the uncertainty around COVID-19 impacted your strategy?
DJ: “Our strategy puts the customer at the center of everything that we do. We try to react to any stress or duress that the customer has. [During the early part of the pandemic], we didn’t have our stores open but we were able to service that consumer almost exclusively digitally, and as we’ve been able to open the stores, we’ve tried to create a safe and healthy environment for our customers and our store associates. Our associates wear masks, we’ve got social distancing parameters in place, we continue to keep some capacity limitations in place — we try to respond to everything that the customer is feeling and react accordingly. The pandemic is going to be around for a while and we’re going to have to learn to live with COVID. It looks a lot different this back to school season than it did a year ago. A year ago, kids weren’t sure whether they were going back full-time physically, whether they were going to be in some sort of hybrid mode or whether they were going to be virtually only. It feels like people are going back to school year, and the bigger question in most districts it feels like in most states is should students and teachers be masked? I am a believer that masking and social distancing along with vaccinations are the thing that will get us into a situation where we can all deal with COVID for the long term.”
How do you expect promotional activity to play out in the back half of 2021?
DJ: “We’ve run the first half with record low markdowns, the inventories are lean and there’s fresh goods flowing into the business, which is the best possible scenario for our business model. As we think about the seasonal change, as we think about the flow of goods, I expect that things will be a bit more promotional in the back half. I feel good about our product assortment, I feel good about the product flow as we see it today. Our promotional activity will hopefully be able to be kept to a minimum, but at the same time, we do have to react to the marketplace as it gets a little bit more promotional. I think in general, the inventory across the industry is in a pretty good position, so I don’t think we return to the historical levels of promotional activity, but I do think the back half will be somewhat more promotional than the first half was.”
You cited strong results with your women’s and kids’ footwear business. What can you attribute this to?
DJ: “In the women’s business, we’re doing a better job serving her both digitally and physically in the stores, and our focus on assortment. She has sort of jumped into this culture of basketball silhouette, and the [Nike] Dunk has been good for her, the AJ1 has been good for her — she’s really adopting that as part of her uniform. I think in women’s, we’re just doing a better job of sorting, merchandising, selling and serving her on our digital channels with content and the ability to buy, and also in store. I would say the same is true of the kids’ side. We’re continuing to bring in that next generation of sneakerheads with parents who grew up with Foot Locker, who grew up with Champs Sports, who see that it’s the right place to go and buy for the kids. We’ve always had a good grade school business, but there’s been some real conviction around our littles and preschool business, and we’ve done a better job bringing apparel into more stores on the kids side as well, which fuels a bigger basket and a better experience.”
How do you expect the culture of basketball to continue to move the needle in Foot Locker stores?
DJ: “Basketball has always been a cornerstone of what we do, and we’ve supplemented that with a great running business, we’ve [supported] that with the stronger seasonal business, we brought in more brands, etc. With our connection with House of Hoops and Nike, we saw some great additional products coming in from New Balance, Adidas, Puma, there’s great excitement around the basketball category, both from a heritage and a new perspective. Even our European consumer is moving toward basketball as one of those go-to silhouettes. Europe has always been much more of a running-led and football/soccer-led environment, but the team there has done a great job taking some of the principles that our merchant team has done in amplifying it in the market, and we’re really seeing some nice uptick in Europe. As we open up our markets in Asia, a lot of the great heat silhouettes come out of basketball. It’s important in virtually every market.”
What are your expectations with entering the Indonesia market and the two stores slated to open in Q4?
DJ: “We’ve got a great partner in Map Active, and they really know the marketplace. They’ve got some great brands there that they represent. It’s a little bit different marketplace, it’s one of those places that you have to go in with a partner because of foreign ownership laws, but Map Active certainly knows the marketplace. We expect that the stores will certainly be successful. We’re going to put in a Power Store and a core store to see what the customers reactions are. The price points will probably be a little bit different, but we know that there is a good group of sneakerheads in Indonesia that will be really thrilled to have Foot Locker as an option for them to shop in the market.”
Was Foot Locker in acquisition mode prior to the WSS and Atmos transactions? Or did these opportunities present themselves and they were too good for Foot Locker to pass up?
DJ: “We’ve talked for years that our No. 1 objective with the capital that we had was to invest in the business, and for the last few years we’ve been through store improvements, supply chain improvements and digital improvements. We’ve always had an eye to the marketplace to see what was right in our portfolio, and when we look at both Atmos and WSS, they serve our portfolio really well. The team at WSS has done a great job of connecting with that Hispanic consumer, it’s a full-family offering. Stores are bigger, they’ve got an interesting service model in that they recognize when customers want to be helped and they drive great service, but they’re not all over the customer as soon as they walk in the door. Atmos, on the other hand, is obviously near the top of the pyramid, the marquee products that Hommyo [Hidefumi] and his team work with our brand partners in collaboration on, and has created a lot of heat products in the industry.”
Rival JD Sports has been in acquisition mode since 2018. Are the WSS and Atmos transactions at all reactionary?
DJ: “They’re certainly not reactionary. The truth is that we look for opportunities to strengthen our portfolio, and for us, it was about identifying new brands that have deep connections with the consumers that they serve, have a lot of the same core values that we possess and bring incremental value to our overall portfolio.”
How can Foot Locker best leverage its relationship with GOAT?
DJ: “The ecosystem for sneakers is pretty complex and our focus is on the primary market. GOAT’s focus is clearly on the secondary market where they connect buyers and sellers of product. We work with Eddy [Lu] and Daishin [Sugano] and the team there to understand customer behaviors, we look at supply chain opportunities and how we can help optimize some things. But we’re a minority investor in GOAT, and we continue to work with them to identify ways that we can better serve customers and ultimately create a stronger sneaker ecosystem from top to bottom.”
There was a strong return of consumers to your stores for the quarter. Where do you expect brick-and-mortar and e-comm to settle out?
DJ: “That’s ultimately up to the customer. Our job is to create great connections with the customer, and where they choose to transact with us is somewhat less important. We’re going to continue to invest in brick-and-mortar and we’re going to continue to invest in digital. We will always be a digital-led company, we will lead with great digital content. If we do that, they will think of us first.”