2023-07-26 16:13:50 ET
Summary
- Foot Locker, a global shoe retailer with approximately 2,700 locations, is in the early innings of a turnaround.
- The company has brought in a CEO from the outside with a successful track record.
- In this article we evaluate the turnaround plan and the board's new appointment.
Background
Foot Locker ( FL ), the worldwide shoe retailer with around 2,700 locations, has seen better days. Despite hitting all-time high revenue of around $9 billion in 2022, investors seem to have recently soured on the company.
Over the last five years, Foot Locker has turned in a poor showing for shareholders, returning a negative 35% total return versus the S&P 500's ( SPY ) total return of 76%.
Recent leadership shakeups however seem to have moved the company until the year's first quarter sales reports caused the stock to tank by more than 35% (more on that later).
In August, Foot Locker named Mary Dillon, the former CEO of Ulta Beauty ( ULTA ), to take the role of CEO. She seemed to waste no time in looking to assemble a new team, with the prior CFO departing in early 2023.
With the performance of recent years, disappointing quarterly earnings, and a new management team, we think it uncontroversial to say that Foot Locker is a company in turnaround and that Dillon has a lot of work ahead of her. In this article we'll assess whether or not the new management team could succeed in turning around the brand.
Let's dive in.
Not Business As Usual
One of the more obvious issues with Foot Locker's traditional in-store business in the digital age is its historic reliance on shoemakers, which are now largely turning to a direct-to-consumer model of sales and cutting out a layer of retail. With 65% of its 2,700 stores residing in-mall as well, the company has also been vulnerable to the secular slowdown in mall traffic.
To combat these issues, Foot Locker rolled out its Lace Up plan in the first quarter, which represents Dillon's strategic vision going forward for the company.
Typically, we are very skeptical of management turnaround plans and will normally take a wait-and-see approach. However, Dillon has a track record that we can measure.
In her eight-year tenure as CEO at Ulta, the company generated impressive returns of 252%. During that time the makeup giant developed and refined its online presence, and quarterly sales increased by triple digits during her tenure.
Foot Locker's board , meanwhile, sports a modest ten members with ample retail experience, including Virginia Drosos, who has executed her own turnaround as the current CEO of Signet ( SIG ).
A large part of the transformation proposed by the Lace Up plan has to do with making Foot Locker's digital presence more immersive. A Wall Street Journal article quoted Dillon as saying that "Ninety-nine percent of our customers connect with us digitally but only 20% buy digitally… How can we create a better experience for them to click and buy?"
This is an opportunity indeed. According to Foot Locker's most recent 10-Q , only $314 million of the company's $1.9 billion quarterly sales came from direct-to-customer online purchases.
The full plan encompasses more than just online purchases, however. In its investor presentation outlining the plan, the company states that only 25% of all purchases come from customers enrolled in the Foot Locker loyalty program--a shockingly low number given the stickiness of sneakers and frequency with which so-called 'sneakerheads' buy shoes.
The Numbers
For what it's worth, the balance sheet at Foot Locker isn't terrible. With long term debt of only $445 million, the company at the end of its first quarter had $3.2 billion in shareholder equity.
The big questions regarding the balance sheet, however, are the company's inventory levels, which sat at $1.7 billion at the end of the first quarter.
This, combined with falling sales, caused the company's days outstanding inventory to rise to 114 at the end of the first quarter.
Management is aware of the problem, and as one would expect of a retailer, the company has ramped up its promotional operations to move inventory through the door. On the most recent conference call , Dillon noted:
[W]e increased our promotional activity late in the first quarter and more so in the second quarter and we expect that level of promotional activity to continue through the balance of the year, which will allow us to clear inventory and bring more newness to our customers.
She went on to state that 2023 will be a reset year for the company, and that in 2024 she expected a return to growth.
The Bottom Line
It may be too early to make a call on Foot Locker right now, but in these early innings of the turnaround, we like what we see. Bringing in a new CEO from the outside with experience in transforming digital sales operations is, in our view, an astute move by the board. Recognizing as well that the turnaround--if successfully executed--will take time gives Dillon and her team a few quarters of space to execute against their plan while expectations from Wall Street remain relatively low.
Further, the 35% drop in share price on a 9% year-over-year decline in sales seems to be a bit of an overreaction from the market, and could present an interesting risk/reward scenario for intrepid investors. We will be watching the Lace Up turnaround closely for signs of a successful execution.
For further details see:
Foot Locker Could Be Lacing Up For A Turnaround