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Foot Locker's Omni-Channel Efforts Aid, Margin Woes Stay

Foot Locker, Inc. FL is trying to improve its performance through operational and financial initiatives. The company has been investing in digital platforms, improving supply-chain efficiencies and effectively managing inventory. In addition, management’s commitment to develop the Power Store concept to offset mall-related pressure is encouraging. Its strategic deals, including partnership with NIKE NKE to enhance its assortment and drive growth, is likely to keep yielding positive results.

Foot Locker’s digital endeavors comprise improvement of mobile and web platforms, worldwide implementation of new point-of-sale software and expansion of data analytics capabilities. Management also substantially completed the rolling out of the new point-of-sale software. In fact, the company’s digital efforts have been driving quarterly performance. In fiscal second quarter, the digital business was a standout. The business delivered triple-digit growth even after the stores were reopened. This performance was buoyed by a host of factors including strength in product assortment and pent-up demand. Direct-to-consumer (DTC) channel strengthened and increased 173% during the second quarter of fiscal 2020. As a percent of sales, DTC rose to 33.2% of sales, up from 14.3% last year.

Apart from these, the company plans to spend a major portion of the capital on its fleet of stores, including revamping and remodeling of the same. During second-quarter fiscal 2020, the company incurred capital expenditures of $31 million, funding the opening of 18 stores and remodeling or relocating of 26 stores. Management expects investing about $156 million in fiscal 2020. Management has also rolled out new membership program FLX that inspires customers to remain within the Foot Locker portfolio of banners.

Despite these positives, Foot Locker continued to struggle with soft margins for a while. While gross margin contracted 420 basis points (bps) during the second quarter of fiscal 2020, operating margin declined 130 bps. Lower merchandise margin rate is mainly weighing on gross margin, which in turn is hurting the operating margin. In the recently reported quarter, merchandise margin rate decreased 700 bps, mainly owing to the markdowns to clear aging assortments and a higher mix of DTC. Going ahead, management forecasts a continued promotional environment. In addition, the company has been monitoring higher rates from its shipping partners, which are expected to increase freight costs in the back half of the fiscal.

Nonetheless, we expect the Zacks Rank #3 (Hold) company’s aforementioned omni-channel initiatives to boost sales and heal margin concerns going ahead. In fact, the company is poised well to cash in on the evolving customer-shopping trends based on the strength of its omni-channel endeavors. Encouragingly, the New York-based company’s shares have increased 30.4% in the past three months, compared with the industry’s 32.6% rally.

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