TOP CONTRIBUTORS

Shawn Woodhull

Francis D'Hondt

Michael Mitchell

FL AT A GLANCE

P/E ► -23.8   EV/EBITDA ► 146 VERY HIGH ROA ► -1.7% AVG ROE ► -3.3% AVG Debt to Equity ► 0.525 AVG Current Ratio ► 3.72 HIGH Interest Coverage Ratio ► -4.88 AVG

 

 

 

 

 

 

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 2009 as same-store sales, a key gauge of retail performance, fell 12% in second quarter 2009.^{[4] [5]} Net income in the third quarter of 2009 was $16 million, down from $24 million the year before, while its revenue was $1.214 billion, a 7.3% decrease from the year before. This was mostly attributed to an 8.2% decrease in third quarter comparable-store sales.^[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.

Business Overview

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.

For fiscal 2008, Foot Locker made $5.24 billion in revenues, a decrease of 3.7% from the year before. Its net income for the year was -$80 million, a decrease of 277.8% from fiscal 2007.^[2] As of January 2009, Foot Locker had 3,641 stores internationally, a decrease of 3.8% from the number of stores it had as of February 2008.^[9]

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.

As of fiscal 2008, Foot Locker obtained approximately 72% of its revenue from the United States, with the rest coming from Europe, Canada, and Oceania.^[10]

Increasing Efficiency by Closing Stores

After Foot Locker's company-wide operating margin fell to 6.6% in 2006 (from 7.2% in 2005), ^[12], 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).^[13] The store closings continued in 2008, as the company closed a total of 208 stores and opened 64 more, cumulating in a net reduction of 3.8% in number of stores.^[9]

Below is a breakdown of the net store closures by store format in 2008, and the amount of change in number of each store from fiscal 2007 to 2008:^[9]

• Foot Locker: 85 stores closed (-2.8%)
• Footaction: 22 stores closed (-5.9%)
• Lady Foot Locker: 45 stores closed (-7.6%)
• Kids Foot Locker: 28 stores closed (-5.0%)
• Champs Sports: 28 stores closed (1.9%)

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 80% of Foot Locker's products came from only five companies in FY 2008.^[14]

Nike—the world largest athletic footwear and apparel maker—accounted for approximately 64% of Foot Locker's products in 2008.^[14] 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

Trends and Forces

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.

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.^[15][16] 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.^[17]

Targeting a New Demographic: Skateboarders

In November 2008, Foot Locker acquired Delia's CCS business for $103.2 million.^[18] CCS is a direct-to-consumer (internet and catalog) retailer of skateboarding apparel, footwear and accessories, mailing approximately 18 million catalogs annually.^[19] 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.^[18]

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.^[20][21] In addition, Finish Line only operates stores within the U.S. whereas Foot Locker has significant international operations.

Note: All figures for year 2008.

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^[24]
• 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

References

1. ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
2. ↑ ^{2.0 2.1 2.2} Google Finance FL
3. ↑ Google Finance FINL
4. ↑ Reuters, "Foot Locker, Hibbett results slip on weak sales"
5. ↑ Foot Locker (FL) Press Release, Second Quarter Fiscal 2008 Results
6. ↑ PR Newswire: Foot Locker, Inc. Reports Third Quarter Results
7. ↑ Foot Locker 10-K 2006, "Risk Factors", p. 3
8. ↑ Foot Locker 10-K 2006, "Risk Factors", p. 3
9. ↑ ^{9.0 9.1 9.2 9.3 9.4} FL 2008 10-K, page 9
10. ↑ FL 2008 10-K, page 4
11. ↑ Foot Locker Annual Report 2006, "Business Overview", p. 5
12. ↑ [http://sec.gov/Archives/edgar/data/850209/000120677407000876/footlocker_10k.htm Foot Locker 2006 10-K, "Five Year Summary of Selected Financial Data", p. 62
13. ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
14. ↑ ^{14.0 14.1} 2008 10-K, page 3
15. ↑ Foot Locker Third Quarter Earnings Release 2007, "Third Quarter Results"
16. ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
17. ↑ "Foot Locker reverses year-ago loss in 3Q" MSNmoney.com 11/20/2008
18. ↑ ^{18.0 18.1} MSNmoney.com 11/5/2008
19. ↑ DLIA 2007 10-K, Item 1, pg. 4
20. ↑ Foot Locker (FL) Press Release, Fourth Quarter Earnings Release
21. ↑ Finish Line (FINL) Press Release, Fourth Quarter Earnings Release
22. ↑ Google Finance: FINL
23. ↑ FINL 2008 10-K, page 12
24. ↑ Dick's Sporting Goods Annual Report 2006, "Segment Information", p. 49