Foot Locker on Friday announced an elevated partnership model with Nike including a pop-up in New York City dubbed the "Sneakeasy." The retailer also announced a "House of Hoops" at some stores, including Boston and New York, offering Nike and Jordan basketball sneakers worn by top players on the court, according to a company press release.
As part of the partnership, the athletic apparel retailer is also hiring new specially trained experts, to "drive elevated customer experiences at Foot Locker by offering and sharing an emotional connection" to top Nike products, according to the release.
The announcement comes as the retailer reported net income of $102 million, or $0.81 per share, in the third quarter, down from net income of $157 million, or $1.17 per share in the year-ago period, according to a company press release. Same-store sales in the quarter fell 3.7% and total sales fell 0.8% (or 2.3% currency neutral) to $1.87 billion this quarter, down from $1.89 billion in the prior-year period. Gross margin rate in the quarter fell to 31% of sales from 33.9% a year ago, and the selling, general, and administrative expense rate increased 30 basis points to 19.7% of sales, including $7 million in hurricane-related costs, mostly from damaged or lost inventory, the company said.
Foot Locker handily beat expectations in the third quarter and met its own same-store sales goal, sending shares soaring 28% Friday — its best trading day since 1977, according to CNBC. That performance is a reflection of earlier sentiment from some quarters that the retailer is in a good position to hold its own against Amazon. But operating income plunged 27% year over year amid ongoing challenges and a highly promotional environment.
"While gross margins are pressured by high promotional levels, the company remains disciplined with regards to expense management and inventory levels," according to a note emailed to Retail Dive from Moody's Assistant Vice President and Analyst, Mike Zuccaro, who noted that the retailer's results, though down, beat Moody's analyst expectations."Its market position remains solid, as evidenced by its announced elevated partnership with Nike."
Foot Locker's financial position is also solid, with modest debt, Zuccaro noted. "When coupled with solid free cash flow, the company has the ability to weather near term challenges while balancing investment in the business with ongoing shareholder returns," he said.
While Wall Street warmed to the retailer's good numbers, its results in the quarter show that it's "still moving backward," warned GlobalData Retail analyst Anthony Riva. "Some of the numbers came in above forecast, which cheered investors; however, in our view, this is of scant comfort when the company is losing market share and seeing its profits decline," he said in an email to Retail Dive.
Foot Locker's athletic gear is doing well, but it's underperforming in more casual styles, a problem at a moment when streetwear is of increasing importance. That, and declining traffic in stores, doesn't bode well. "Staying on top of its game in terms of the assortment is critical if Foot Locker is to fend off the challenge of brands selling direct and via other channels such as Amazon," Riva said. "While Foot Locker management has previously indicated that they do not see these trends as particular threats to the business, we believe they have the potential to severely undercut the need for customers to visit Foot Locker stores."
Its elevated partnership with Nike is a strong play, but that's unlikely to temper the market share Nike will enjoy through its own move to sell directly on Amazon, Riva said. Still, "Sneakeasy" and "House of Hoops" will help and they show that Nike itself has confidence in the retailer, Riva also said. "While this does not reduce Foot Locker's reliance on third-party brands, it provides some comfort that it has the backing of the leading brand at a time when traditional routes to market are being reconfigured," he said.
The company in the midst of a turnaround, letting go some executives, reorganizing its North America operations, amplifying its North America marketing and closing underperforming stores as it improves its e-commerce and mobile platforms to make them more engaging and easier to use, as well as its supply chain. "These initiatives, along with the better use of customer data, should enable Foot Locker to provide a more personalized and responsive experience for its customers," Riva said. "The dividends from all these things will likely come during the next fiscal year."
Those actions are aimed at more than mere survival in a tough retail market, CEO Richard Johnson told analysts Friday, according to a transcript from Seeking Alpha. "Rather, we are proactively adjusting our course to ensure that Foot Locker will continue to thrive at the center of sneaker culture or more broadly, youth culture," he said.
"Through the creation of outstanding customer engagement, experience and satisfaction, we believe we will also thrive financially in terms of shareholder returns over the long term."
Riva also said the fruit of those efforts will likely come during the next fiscal year. Beyond that, the good news is that those efforts show that executives are well aware of their predicament. "Overall, this has been a lousy year for Foot Locker," Riva said. "The company has lost ground and has been a victim of a more challenging market. However, we believe management is aware of the issues and is taking steps to put the brand back on track."