|
|
Topic
Top news source/blog that we're missing
Why do you recommend this news source?
|
||
Foot Locker (NYSE: FL) sells more athletic shoes than any other retailer in the U.S. The company offers athletic footwear and clothes in nearly 4,000 stores across North America, Europe and Asia through its eponymous Foot Locker locations, which even have specialized stores just for women and kids, as well as FootAction and Champs Sports.[1] In 2008, Foot Locker generated $5.24 billion in total revenue, a 3.7% decrease in sales from 2007.[2] Despite the decline in sales, Foot Locker remains far ahead of second place U.S. footwear retailer Finish Line by revenue, which reported $1.26 billion in 2008 sales.[3] Foot Locker's struggles have continued in fiscal 2008 as net sales increased 0.5% and comparable store sales declined 1.7% through the first half of the year, respectively.[4] Net income in the first quarter of 2009 was $31 million, a sharp increase from $3 million in the prior year (due to charges and expenses related to store closures).[5] [6]
Foot Locker's approach to merchandising is to offer trendy brand name products (although it does have some private label products). Consequently, its five biggest vendors accounted for 80% of its products in 2006, with athletic equipment behemoth Nike comprising 50% of all offerings. [7] [8] These ties to Nike allow Foot Locker to offer exclusive products and experiences but also expose the company to significant risk from a pricing perspective.
During 2007, Foot Locker focused on improving operating margins by axing under-performing stores, as it performed quite an overhaul on its store base. As of May 2, 2009, the company operated 3633 stores in 21 countries in North America, Europe, and Australia. In Q1 2009, Foot Locker closed 24 stores, relocated or remodeled 47 stores, and opened 16 new stores.[6] In the prior year, the company shut down 274 underperforming stores.[9] High costs associated with closing all these stores, such as lease termination fees, etc., significantly impaired Foot Locker's profits for 2007, as the company posted an operating loss of $50 million. Despite closing 274 stores during 2007, Foot Locker expects to close an additional 140 stores during 2008, signaling the company's focus on improving company-wide profitability by looking at each store. In the first quarter of 2008, Foot Locker closed 60 more stores, while simultaneously opening 33 new locations for a net decrease of 27 stores.[10]
Foot Locker's store-by-store evaluations and closings may be reflective of an overall slowdown in athletic footwear and apparel, which grew worldwide only 6% from 2004 to 2005 compared to 12% from 2003 to 2004. In addition, Foot Locker depends heavily on consumption from the U.S., where 80% of its stores are based. As one of the largest specialty retailers in the country, Foot Locker is particularly prone to downturns in the American economy that can constrain consumer spending on non-essential goods like fashionable athletic footwear.
[edit] Business Overview
[edit] Financial Performance
Foot Locker sells shoes and apparel in its physical retail stores as well as through direct-to-customer sales via Footlocker.com (the company's e-commerce website) and the Eastbay website and catalogs.
In 2007, Foot Locker's total sales dipped to $5.4 billion from $5.75 billion in 2006, drawing revenue from over 3,780 stores across North America, Europe and Australia.[11] Foot Locker's profit margins fell considerably in 2007, largely due to store closings and related costs; the company posted a 26.1% gross margin, down from 30.2% in 2006, while recording a $50 milion operating loss for the year.[12] Ignoring charges related to store closings, operating income would be $67 million, which translates to a 0.1% operating margin, still a drastic decline from years past.[13] In 2007, the company closed 157 stores on net (opening 117 new stores while shutting down 274 underperforming locations).[14] The store closings have continued in 2008 as in the first quarter of FY08, Foot Locker closed 60 more stores, while simultaneously opening 33 new locations for a net decrease of 27 stores.[15]
[edit] Store Formats
Foot Locker uses multiple store platforms in order to most effectively segment and target various types of customers in the athletic footwear and apparel market. For example, FootAction stores target urban consumers who are more brand- and trend-conscious while Champs Sports target sports enthusiasts with an broad array of footwear and sporting goods equipment.
| Name | Primary Customer Segment | Product Mix | No. of Stores (end of FY07) | No. of Stores (Q2 FY08) | Gross Square Footage (thousands; Q2 FY08) |
|---|---|---|---|---|---|
| Foot Locker | 12 to 24 Year Old | Men's, Women's and Children's Athletic Footwear, Men's Apparel and Accessories | 1,275 | 1,245 | 5,074 |
| FootAction | 16 to 34 Year Old - Urban | Same as Foot Locker, Increased Emphasis on Branded Apparel | 356 | 343 | 1,600 |
| Lady Foot Locker | 14 to 35 Year Old Females | Women's Athletic Footwear, Apparel and Accessories | 526 | 518 | 1,148 |
| kids Foot Locker | 5 to 11 Year Old Children | Children's Athletic Footwear, Apparel and Accessories | 321 | 312 | 756 |
| Foot Locker Int'l | 12 to 20 Year Old | Same as Domestic Foot Locker | 731 | 737 | 2,147 |
| Champs Sports | 12 to 25 Year Old | Same as Domestic Foot Locker; Athletic Equipment | 576 | 573 | 3,096 |
About 80% of Foot Locker's stores were based in the U.S. as of FY 2007, although its international segment was growing. Sales abroad are concentrated in Europe, with approximately 40% of international revenue came from stores in Italy and France.[18]
| Country | No. of Stores (end of 2006) |
|---|---|
| United States | 3,083 |
| Puerto Rico | 76 |
| Virgin Islands | 9 |
| Canada | 169 |
| Europe | 509 |
| Australia | 78 |
| New Zealand | 14 |
| Guam | 4 |
[edit] Increasing Efficiency by Closing Stores
After Foot Locker's company-wide operating margin fell to 6.6% in 2006 (from 7.2% in 2005), [20], the company began an initiative to improve efficiency and profitability by changing their store base. This strategy comprised opening new stores, relocating existing stores to optimal locations and closing down unproductive stores. During 2007, Foot Locker closed 157 stores on net (opening 117 new stores while shutting down 274 underperforming locations).[21] The store closings have continued in 2008 as in the first quarter of FY08, Foot Locker closed 60 more stores, while simultaneously opening 33 new locations for a net decrease of 27 stores.[22]The initiative is still incomplete, as management plans on closing about 140 stores during 2008, while opening about 60 stores and remodeling/re-locating around 200 stores.
Below is a breakdown of the net store closures by store format in 2007:[23]
- Foot Locker: 93 stores closed (-6.8%)
- Footaction: 17 stores closed (-4.6%)
- Lady Foot Locker: 31 stores closed (-5.6%)
- Kids Foot Locker: 214 stores closed (-4.2%)
- Foot Locker International: 2 stores closed (-0.3%)
- Champs Sports: no net change (0%)
[edit] 80% of Products Sourced from 5 Manufacturers
The overwhelming majority of Foot Locker's offerings are the top brands in athletic footwear and apparel, including Nike, Timberland and Adidas. However, this means that Foot Locker receives most of its products, and subsequently sales, from a small number of brand manufacturers. About 78% of Foot Locker's products came from only five companies in FY 2006.[24]
Nike—the world largest athletic footwear and apparel maker—accounted for approximately 50% of its products from Nike in 2006.[25] This is an incredible amount of Foot Locker's sales that depend upon Foot Locker being able to procure products from Nike.
Rewards:
- Foot Locker is able to showcase top brands that its customer's want, such as Nike and others.
- Its close relationship with Nike has enabled creative joint ventures such as creating a new type of athletic footwear and apparel retail store called "House of Hoops" which focuses on basketball shoes and apparel.
Risks:
- Since Foot Locker depends on Nike for about half of its product offerings, the company is at the mercy of the athletic equipment giant when negotiating purchasing contracts (prices, distribution, promotion, etc.); this same concept applies, to a lesser extent, with Foot Locker's other top vendors.
- If for some reason Nike or another top vendor was unable to supply Foot Locker with products or was to break off its relationship with Foot Locker, the retailer would suffer significantly.
- Strong dependence on several key vendors may hinder the company from significantly increasing its private label offerings, which tend to have higher gross margins as well as engender brand loyalty to the retailer
[edit] Trends and Forces
[edit] Global Slowdown for Athletic Footwear and Apparel
The global market for athletic footwear has grown in the last several years, but the market is cooling down with a reduced growth rate.
| $m | Global Market | 2003 | 2004 | 2005 |
|---|---|---|---|---|
| Athletic Footwear | 18,467 | 22,000 | 24,169 | |
| Athletic Apparel | 43,931 | 47,823 | 49,535 | |
| Total | 62,398 | 69,823 | 73,704 | |
From 2003 to 2004, the market for athletic apparel and footwear grew by almost $7.5 billion, 12%. Between 2004 and 2005, however, it grew by less than $4 billion; in percentage terms, the 6% growth was only half as high as growth a year earlier.
[edit] Seasonality
Seasonality affects Foot Locker's sales in two ways:
- As a retailer, Foot Locker typically generates disproportionately higher sales during the fourth quarter holiday season. Thus, a stronger or weaker than normal holiday season can considerably help or hurt Foot Locker.
- Because many of Foot Locker's products are used in warm weather, outdoor activities (running, outdoor sports, walking, etc.) and are not suitable for winter weather (consumers are much more likely to buy boots during the winter than a new pair of running shoes or basketball shorts), sales can slump during the winter seasons. Foot Locker counters this in part by carrying some winter footwear and apparel (such as Timberland boots and outerwear). By changing their product mix and pushing trendy products during the holiday season as gifts Foot Locker attempts to counteract the drag winter weather has on sales of athletic footwear and apparel.
[edit] Macroeconomic Downturns: Squeezing Consumer's Wallets
As a retailer of non-necessary goods Foot Locker is one of the first companies to lose sales when poor economic conditions dampen consumer spending. Since Foot Locker's product lines are not diversified with non-athletic offerings (e.g. groceries) and the store is focused on mid-luxury brands like Nike, it is more exposed to economic downturns than other retailers such as Wal-Mart Stores (WMT) and Target (TGT).
In the second half of fiscal 2007 Foot Locker felt some of the effects of the credit crunch caused by the subprime mortgage fallout of the summer 2007. The credit crunch has been significantly hurting the retail industry by cutting down on consumer spending. During that quarter, Foot Locker experienced decreasing sales and profits (partially due to store closings) but same store sales, a key indicator of a retailer's health, in the third and fourth quarter of 2007 fell 5% and 7.8%, respectively.[26][27] Furthermore, its Q3 2008 sales dropped by 3.5%, following a 1.7% decrease in same store sales as consumers felt the pinch of the economic downturn.[28]
[edit] Targeting a New Demographic: Skateboarders
In November 2008, Foot Locker acquired Delia's CCS business for $103.2 million.[29] CCS is a direct-to-consumer (internet and catalog) retailer of skateboarding apparel, footwear and accessories, mailing approximately 18 million catalogs annually.[30] The move represents an attempt on Foot Locker's part to appeal to a younger target market, particularly in the rapidly growing action and extreme sports categories.[29]
[edit] Competition
Foot Locker is the leading athletic footwear retailer in the U.S. in terms of sales as well as most measures of profitability. Foot Locker's main competitor in the athletic footwear and apparel specialty retail market is Finish Line, whose $1.27 billion in 2007 sales significantly trailed Foot Locker's $5.4 billion.[31][32] In addition, Finish Line only operates stores within the U.S. whereas Foot Locker has significant international operations.
| Company | Total Revenue (mm) | Gross Profit (mm) | Gross Margin | Operating Profit | Operating Margin | Total Stores | Domestic Stores | International Stores | Same Store Sales Increase (Decrease) | Sales Per Square Foot | Sales Per Store (mm) |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Foot Locker | $5,750 | $1,736 | 30.2% | $381 | 6.6% | 3,942 | 3,083 | 859 | (1.2%) | $395 | $1.46 |
| Finish Line | $1,338 | $401 | 30.0% | $51 | 3.8% | 789 | 789 | 0 | (5.7%) | $320 | $1.69 |
Note: All figures for year 2006.
Besides Finish Line, Foot Locker also competes with other retailers that sell athletic footwear as part of their overall product mixes, including:
- Dick's Sporting Goods: footwear accounted for approximately $527 million of DKS's $3.1 billion of net sales in 2006[35]
- The Sports Authority is a privately held sports equipment, apparel and shoe retailer with approximately $2.7 billion in overall sales
- Payless Shoesource (PSS) is a general footwear retailer that also sells athletic footwear
- Wal-Mart Stores (WMT) and Target (TGT) are one-stop shopping retailers that offer a limited selection of athletic footwear and apparel in their stores. Neither company breaks out their sales by specific category
[edit] References
- ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
- ↑ Google Finance FL
- ↑ Google Finance FINL
- ↑ Foot Locker (FL) Press Release, Second Quarter Fiscal 2008 Results
- ↑ Foot Locker (FL) Press Release, First Quarter Financial Results 2008
- ↑ 6.0 6.1 Foot Locker Press Release, First Quarter Financial Results
- ↑ Foot Locker (FL) 10-K 2006, "Risk Factors", p. 3
- ↑ Foot Locker (FL) 10-K 2006, "Risk Factors", p. 3
- ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
- ↑ Foot Locker (FL) Press Release, First Quarter Financial Results 2008
- ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
- ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
- ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
- ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
- ↑ Foot Locker (FL) Press Release, First Quarter Financial Results 2008
- ↑ Foot Locker (FL) Annual Report 2007
- ↑ Foot Locker (FL) Press Release, Second Quarter Financial Results 2008
- ↑ Foot Locker (FL) 10-K 2006, "Segment Information", p. 38
- ↑ Foot Locker (FL) Annual Report 2006, "Business Overview", p. 5
- ↑ Foot Locker (FL) 10-K, "Five Year Summary of Selected Financial Data", p. 62
- ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
- ↑ Foot Locker (FL) Press Release, First Quarter Financial Results 2008
- ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
- ↑ Foot Locker (FL) 10-K 2006, "Risk Factors", p. 3
- ↑ Foot Locker (FL) 10-K 2006, "Risk Factors", p. 3
- ↑ Foot Locker (FL) Third Quarter Earnings Release 2007, "Third Quarter Results"
- ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
- ↑ "Foot Locker reverses year-ago loss in 3Q" MSNmoney.com 11/20/2008
- ↑ 29.0 29.1 MSNmoney.com 11/5/2008
- ↑ DLIA 2007 10-K, Item 1, pg. 4
- ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
- ↑ Finish Line (FINL) Press Release, Fourth Quarter Earnings Release
- ↑ Foot Locker (FL) 10-K 2006, "Five Year Summary of Selected Financial Data", p. 62
- ↑ Finish Line (FINL) 10-K 2007, "Selected Financial Data", p. 16
- ↑ Dick's Sporting Goods (DKS) Annual Report 2006, "Segment Information", p. 49
| ||||||
|
|
