Foot Locker Shares Fall Sharply on Weak Q2, but CEO Mary Dillon Confident About Turnaround

Foot Locker on Wednesday posted disappointing results for the second quarter and again cut its outlook for the year, sending its shares down sharply on Wall Street. But that’s not fazing president and chief executive officer Mary Dillon, who maintained confidence in the retailer’s ability to pick business back up with its turnaround strategy.

As she approaches the one-year mark as CEO, Dillon said she feels as excited and confident about Foot Locker’s potential as she did on Day One.

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“Now we really have the right team, and the plans in place to return our company to sustainable long-term profitable growth,” Dillon said in an interview on Wednesday, adding that the company is already seeing “green shoots” in its turnaround plan.

Foot Locker in March rolled out its “Lace Up” plan, a multipronged strategy meant to help the retailer increase market share and grow sales to $9.5 billion by 2026 by diversifying its brand portfolio; relaunching the Foot Locker brand with new store formats focused on an off-mall presence; maximizing its loyalty program, and investing in technology to enhance the customer journey.

But it has a way to go. Shares fell sharply on Wednesday by 28.3 percent to close at $16.64 after the retailer reported a sales drop and loss in the second quarter.

Dillon said while Foot Locker has made progress on several of its initiatives, some of the short-term impact is what is showing up in the second-quarter results right now. For example, while Foot Locker maintains a strong partnership with Nike, the retailer is gradually moving to a more diverse product mix and decreasing the percentage of Nike sales overall. Sales of non-Nike brands increased to 36 percent in the second quarter, up from 31 percent in the same quarter last year. The goal is for Nike sales to make up between 55 percent and 60 percent of Foot Locker’s total sales mix by 2026, which has led to some short-term sales challenges as the retailer recalibrates its assortment.

“It’s well known that coming into this year, it was going to be a reset year for us as we’re transitioning through the reset of Nike in terms of allocating across the marketplace.” Dillon said. “That’s, I think, probably the largest part of why our sales are down now.”

Once the reset period concludes, Dillon said the plan is to work with Nike on further growth plans in key categories like basketball and kids.

Dillon also reaffirmed Foot Locker’s commitment to stop selling Yeezy products last October in light of brand founder Kanye West’s antisemitic statements. While other retailers have started to sell the brand again for current drops, Foot Locker is not going back.

“I appreciate the thoughtful approach that Adidas is taking and donating proceeds to benefit community groups, but we’re just remaining consistent with our decision,” she said.

With no Yeezy and fewer Nike products, Foot Locker is leaning into other high-growth brands like Hoka, On and New Balance.

Moving through August, the retailer anticipates the consumer to remain price-sensitive and discerning as the current promotional environment persists.

“There’s elevated levels of inventories and there’s a lot of strong players competing for the shared wallet of the customer in this category,” Dillon said. “And so we anticipate that will continue to be a factor and that spills into our guidance.”

Executive vice president and chief financial officer Mike Baughn added that Foot Locker’s guidance has accounted for potential headwinds from the resumption of student loan repayments in the fall. However, Baughn noted that Foot Locker has a higher exposure to lower-income consumers, who are less likely to have student debt. This should mitigate the impact to some extent.

“We do expect that people with student loan repayments will be discerning with their discretionary dollars,” Baughn said.

Despite the rocky quarterly results, Dillon stood by the need to create “a plan that drives long-term, sustainable, profitable growth,” even at the expense of short-term profit gains.

“Sometimes it takes a minute,” she added. “But at least in the long term, investing in the right places I think is critical for every business because the world is changing rapidly.”

On Wednesday, Foot Locker said total sales for the second quarter were $1.86 billion, down 9.9 percent over the prior year and slightly short of the $1.88 billion expected by analysts surveyed by Yahoo Finance. The retailer reported a loss of $5 million in the second quarter compared with net income of $94 million in the prior year. Non-GAAP [generally accepted accounting principles] earnings per share decreased to 0.04 cents per share, in line with analysts’ expectations.

Comparable-store sales were down 9.4 percent, in line with the retailer’s projections from last quarter. Foot Locker attributed this drop to “ongoing consumer softness, changing vendor mix, and the repositioning of Champs Sports.” Foot Locker said in March it would close 400 underperforming stores, including close to 125 underperforming Champs locations.

Second-quarter profits also took a hit due to an increase in promotional activity, including higher markdowns and more shrink.

Given the results, Foot Locker once again downgraded its outlook in part due to a softening sales trend that began in July. Foot Locker now expects sales for fiscal year 2023 to be down between 8 percent and 9 percent, compared with a previously outlined guidance of down 6.5 percent and 8 percent. Non-GAAP EPS is expected to be between $1.30 and $1.50, compared with a prior expectation of between $2 and $2.25. Comp sales are expected to be down 9 percent to 10 percent.

Dillon said in a statement that this outlook will help the retailer “compete for price-sensitive consumers” while acting on its turnaround strategy. She also noted that the retailer would pause its quarterly cash dividend beyond an October payout that was recently approved.

Prior to the results, analysts largely took a cautious view on the sneaker giant, warning that soft Nike sales, a weakened consumer base and a general lack of compelling product (including the absence of Yeezy sneakers) would likely play a role in challenging results for the footwear retailer in the second quarter.

And according to a recent note from BTIG analyst Janine Stichter, Foot Locker might also see a negative impact when student loan payments resume in the fall and impacted consumers find themselves with less available cash on hand for discretionary purchases like sneakers.

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