Foot Locker starts streamlining after negative Q1
US sportswear and footwear retailer Foot Locker Inc. has been heavily affected by the crisis caused by the Covid-19 pandemic and, in a conference call with financial analysts for the publication of the results of Q1 2020, closed on May 2, the group announced it is taking strong action.
“As the seriousness of the impact of Covid-19 on the retail trade worldwide became more evident, we have taken steps across our entire organisation to control costs, strengthen our financial position and increase our liquidity,” said Lauren Peters, CFO of Foot Locker.
Peters indicated that, besides borrowing $330 million (€301 million), the group reduced the size of its marketing budget, extended its payment terms, renegotiated rents and cut down on purchases. It also slashed executive remuneration. Moreover, Foot Locker Inc. has decided to cut in half the investment budget for the current financial year, downsizing its store renovation and new opening programme. The group now intends to open 28 new stores and renovate another 47, as opposed to the 65 openings and 125 renovations that were previously planned.
In Q1 2020, the group opened five stores, renovated another nine and shut down 21 stores. Many shops have had to close temporarily during the lockdown period. In Q1, Foot Locker Inc. generated a revenue of $1.1 billion, losing nearly 43% compared to the same period a year earlier. In-store sales fell by 53%, with double-digit losses reported in all the group's commercial regions, while online sales grew by over 15%. The group’s gross margin dropped from 33.2% in Q1 last year to 23% this year. As of May 21, Foot Locker Inc. had only managed to reopen 45% of its 3,113 stores worldwide.
However, this is also a good time to accelerate the pace of change within the group. In the conference call, Richard Johnson, CEO of Foot Locker Inc., announced that Runners Point, the German chain bought by the group in 2013, will be shut down.
The chain’s forty or so stores that are still operational will switch to either Foot Locker or Sidestep, another chain active on the German market. Also, the Sidestep chain will be operated from Foot Locker Inc.’s European headquarters. The same streamlining strategy is being implemented in the USA, where the group put one single team in charge of the Champs Sports and Eastbay chains, based at the Champs Sports headquarters in Bradenton, Florida. Finally, in the next few weeks Foot Locker Inc. will close down a greater number of unprofitable stores than originally planned, between 150 and 170.
“Our team does a great job of evaluating the risk associated with shopping malls,” said Johnson, adding that “sometimes the solution is to move off-mall. The Covid-19 crisis has been an accelerator [of risk] and in certain cities we think some malls will be endangered. In some cases, we had three doors in the same centre, like at Eight Mile Road in Detroit. We decided to replace them with just one [Foot Locker] store across the highway. We won't get a full recapture rate from all three, but we expect to get a good percentage of it. One thing that's pretty clear is that consumers in a lot of those areas are not direct-to-consumer shoppers, they're not necessarily willing to have products delivered to their front door. So we've got a lot of opportunities related to nomadic retail, pop-up retail, and off-mall initiatives.”
However, Johnson wanted to strike an upbeat note: “There are a lot of great products coming down the pipeline across the second quarter and across the back half [of the year]. Certainly, there will be a glut in inventory, but that glut won’t go against high-heat products. That's a different kind of product, and consumers, our consumers, have a huge appetite for it. We have seen it in the last few weeks. (...) I expect this trend to continue. There has been an unfulfilled desire to consume. Certainly, we intend to end the year in a really healthy inventory position.”
And even though the group will need to ensure a smooth transition between the spring and summer lines, at Foot Locker business seems to be driven by the strong retro-trainer trend sparked by the ESPN/Netflix docu series ‘The Last Dance’, on Michael Jordan and the Chicago Bulls. This has had a clear impact on footwear, with the Nike Air Force 1 and Air Jordan 1 in high demand at the moment, while for Adidas, Peters identified the Yeezy line, as well as the Ultra Boost and NMD franchises as the most sought-after.
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