Athletic footwear retailer Foot Locker, Inc. (NYSE:FL) announced fantastic fourth quarter results last Friday morning, finishing off a tepid 2012. Revenue jumped 14% year-over-year to $1.7 billion thanks to an extra selling week, which was slightly better than consensus estimates. Earnings per share, adjusted for one-time impairment charges, jumped 33% year-over-year to $0.73 per share, slightly above consensus estimates. This did, however, include a $0.09 benefit from the extra week during the quarter.
Same-store sales, one of my favorite metrics to measure the performance of retailers, were fantastic, growing 7.9% year-over-year. The winter quarter is notoriously strong as several of the company’s partners, including NIKE, Inc. (NYSE:NKE) and Adidas, release extremely popular basketball models, and this winter was no different. NIKE, Inc. (NYSE:NKE)’s Jordan Brand in particular had a strong release slate, and the new leadership of the Jordan Brand has pushed for a stronger cadence of releases than we’ve seen in prior years. This could boost NIKE, Inc. (NYSE:NKE)’s North American results, but China remains a huge question mark. During NIKE, Inc. (NYSE:NKE)’s second quarter, in a stark departure from the rest of the company, China was a complete disaster, in my view. Sales of footwear dipped 9% compared to the prior year, apparel sales fell 17%, and total sales fell 12%. Broader economic headwinds remain prevalent, but management took responsibility for the drop in sales. CEO Mark Parker mentioned a change in fit geared toward the Chinese consumer has started to hit the market. Management also indicated that the company will focus on clearing inventory and maintaining brand positioning, which resulted in a futures decline of 7% (excluding currency) during the period.
On the profit side, the gross margin was 100 basis points higher at 32.9%, driven in large part by lower markdowns, and also benefiting from superior IMUs (initial mark-ups). We’re also seeing a much higher degree of rational pricing from competitors like Finish Line Inc (NASDAQ:FINL) and the direct-to-consumer businesses of both NIKE, Inc. (NYSE:NKE) and Adidas. We’re seeing the companies become much more selective with regards to taking markdowns, which in turn has made the consumer less willing to wait—especially if a shoe is in high demand. We believe inventory management is also much more superior, allowing the Foot Locker, Inc. (NYSE:FL) to meet demand instead of having too much supply. SG&A was down 40 basis points as a percentage of sales to 21.2%, but the firm had the added benefit of the extra selling week, which accounted for 20 basis points of leverage. I see only modest SG&A leveraging going forward, as the company has done a wonderful job of controlling costs.
Speaking of Finish Line, we actually think its relative value looks solid (shown below).
The problem with Finish Line has been execution. During its most recent quarter, the firm decided to switch e-commerce platforms on Cyber Monday, which was an unmitigated disaster. Still, its parternship with Macy’s, Inc. (NYSE:M) could add $0.30-$0.35 per share in earnings, while driving incremental cash flow.