Foot Locker, Inc. Price & Performance (FL)

Recognizing the need to better match our capital spending with our top line, we're moderating our CapEx spend as we come into 2025 with an emphasis on our customer facing investments. Embedded in that $300,000,000 figure is greater emphasis on our store projects, including reimagines and refreshes versus the prior year. As you can see highlighted within our investor presentation, the reason why we are leaning into these investments is because of the solid cash on cash returns and favorable paybacks they are generating. For our average reimagine location, we are seeing roughly $4,000,000 to $5,000,000 in sales, and 20% EBITDA margins in year one and are generating cash on cash returns of approximately 50%. For refreshes, we are also seeing attractive cash on cash returns of 35% to 45%. Driven by annualized sales productivity lifts in the low to mid single digit dollar growth range and mid single digit list in merchandise profit dollars Foot. As we complete 300 plus refreshes in 2025, following over 400 last year, we will shift to investing in reimagine formats going forward and expect our store investments to continue to drive returns and generate cash for the business. While our technology investments will continue the next few years, are adjusting the timing of some of the non customer facing technology investment so we can prioritize the projects with highest cash on cash returns in the medium term.

For the year, we expect to continue to be free cash flow as our sales and margin recovery continues along with our broader inventory and working capital management efforts. Moving on to our assumptions on the shape of the year. Recall that we will be lapping the non recurring FLX charge the second quarter of twenty twenty four which we will get back in this year's results. That charge represented an approximate $11,000,000 revenue but not comp headwind in the second quarter a 40 basis point drag on our gross margin in the quarter and a $0.09 detriment to our EPS last year. With our strategic initiatives building through the year, specifically in real estate, we expect comps to accelerate from the first half to the second with the first half closer to the lower end and the second half closer to the upper end of our guidance. We expect our gross margin improvement to be greater in the second half compared to the first half as our initiatives continue to build On earnings, we expect our first half earnings in total flat compared to the prior year inclusive of lapping of that $0.09 FLX charge in the second quarter.

As such, our earnings growth is expected to be weighted towards the second half of the year. Within the first half of the year specifically, we expect profitability to be weighted towards the second quarter as we lap the non recurring FLX charge last year. Before we turn it over to questions, I want to reiterate that we remain confident in our execution of the lease up plan. As well as the profitable market share gains we are seeing as we implement our strategies [indiscernible] We look forward to updating you on our progress against our goals next quarter. And with that, operator, please open the call for questions.

Thank you. We will now begin the question and answer session. And the first question will come from Ana Aderiza with Piper Sandler. Please go ahead.

Great. Thank you so much. Good morning. Thank you for all the color and taking our question. First to Mary, just on quarter to date, can you provide a bit more color on what you're seeing? You mentioned the more cautious consumer. Are you seeing that across demos and regions? And Mike, what are you factoring into outlook for 1Q? And can you guys also speak to what you're expecting for NIKE? Either for the year or the first half as they continue to rationalize the marketplace here in the first in the near term. Thank you. Thank you, Anna. I'll start with your question about the consumer quarter to date. Coming out of holiday, we felt really good the momentum in the business. In January, that was strongest month of the quarter. Our global comps for the quarter were plus 2.6%. So it felt good. As we came into February, I'd say we just started to see some consumer uncertainty begin to pick up. I'd say that was kind of across the board. It led to some choppy performance So what we're seeing is Foot sure people coming out to buy when there's an exciting call to action, but cautious in between those times.

So we talked about just now our All Star Weekend activation, Valentine's Day, Last weekend, we had a Jordan Retro 12, all of those were really exciting, called Act for consumers and worked well. I'd say in between what we're just looking at as consumers with some uncertainty. So our customers are young. By definition, they're more limited in their discretionary budgets. This is for sure a category that they prioritize in their lives. But we're watching as they're thinking about overall cost of living plus some uncertainty about tariffs. So we factored that into our 2025 outlook, reiterating, we know our laser strategy are working and our customers are responding really well to those. So we're going to continue to drive those this year, whether it's a store improvements, digital, loyalty, etcetera. So, I'll turn it to Mike to give a little more detail about these assumptions about the consumer and our guidance.

I think when we think about the full year outlook, really in our guide of 1% to 2.5% comp, Really at the lower end, we're factoring in some of that recent consumer uncertainty that Mary just highlighted And at the higher end, it's really where we've run for the last three quarters, and it factors in our initiatives continuing to perform in a more stable macro environment. Think as you think about our initiatives for the year, it's important to think through both the wraparound benefits from what we did in 2024 and the new benefits that we'll add in 'twenty five. From a refresh standpoint, the 400 stores we did in 2024 were really back half loaded. And we called out in our investor presentation, they're generating low to mid single digit sales and profit slightly above that. And then from a store investment in 2025, 90% of the refresh and reimagines that we will complete will really occur in the first three quarters of the year. Across the digital space, our mobile app really launched in November of twenty twenty four within The U. S. And then we'll have that expand into KFL and Shams in the first part of the year.

SLX was really a mid year benefit in The U. S. From the new program. And we'll add that mid year in EMEA in 2025. As well. And then we'll continue to add doors with key and trending brands like On and HOKA. So a lot of initiatives that are supporting our comp build, but once and surely acknowledge there is some consumer uncertainty that we're seeing in the beginning part of the year As we think about the marketplace more generally, I think in coming into 2025 channel inventories do seem to be in better shape. The promotional tenor in DTC specifically seems to be moderating as we come through the year. And then as we move through the year closer back to school and holiday, we do think the pace of innovation and newness will keep moving in the right direction. Which should be supportive of more full price on. Okay. That's terrific. Thank you so much. And can I ask just a follow-up to Mike?

On SG and A, I guess why aren't you guys seeing bigger cost savings coming through a bit more? Why aren't we seeing more SG and A leverage? This year? And thank you again.

Absolutely, Anna. So acknowledging a lot of moving pieces in our results, structurally we have made progress, but also acknowledge that 24% SG and A is not supportive of our long term profit targets and we'll continue to make steps to lower that Our $25,000,000 guide is modestly leveraged. Excluding the normalization of some incentive comp. And said differently, if you sort of look at what we comped or what we guided coming into '24 versus what we're guiding into '25, which would have normalized incentives. We are showing some leverage within the SG and A category and you'll continue to see us work on that going forward.

The next question will come from Adrian Yee with Barclays. Please go ahead.

Great. Thank you very much and congrats on the progress. Mary, I wanted to talk about the NIKE relationship and sort of I'll use the word surprise or for us like during the quarter, how promotional they got in their own channel, which then created kind of a halo of a promotionality. According to their guidance, they are sort of really taking a lot more gross margin hit in this next quarter. And so I know there's a delay between the marketplace and their business. How far along is this Big three franchise management through in the system, in the marketplace? And if you can talk about, you're probably starting to see some of the new innovation coming down the pipeline for fallwinter. If you can talk about anything that you're seeing there that is surprisingly exciting. And then really quickly, I have to ask the tariff question. I know the answer, but I Foot to ask it anyway. Can you talk about kind of your direct exposure to China, Mexico, Canada? And then in the last iteration of it in twenty eighteen-twenty nineteen, how well were you able to negotiate kind of to partner and kind of split some of that cost or passing along?

Thank you so much. Great. It's a big two parter question. I'll start with you, Tara. Question first. And I mean, certainly, this is a rapidly evolving situation and it's on consumers' minds. We'll watch it closely, of course, how this would impact overall Foot and pricing for consumers across multiple categories could have impact. Would say, first of all, the industry has done some good work over the years to diversify portfolio outside of China. So that's an advantage. And And also, I would say that our direct exposure is pretty moderate to small. And I'll have Mike add a little bit more detail on that. But what we're doing is really just working with our brand partners in communication regularly as the situation continues to unfold. Mike, do you want to add some more? Just a couple of specifics. Within our direct business, we do have some modest exposure to China. It's about half of our private label. Business. But for Total Foot Locker, it's really a low single digit percentage of our sales. We also do have some minor exposure tied to fixtures across China, Mexico and Canada. Pretty modest impact to how we're thinking about our capital plans this year.

And our return profile for those investments are still very healthy. So we'll continue to monitor that. As we go.

Great. And then let's just on Nike, let me step back big picture and then I'll also ask Frank to add more. But one of the things I'm just I'm really proud about the strength of our partnership is focused on our key pillars of basketball, kids and sneaker culture We have a nice strategic partnership with the clinic in HomeCourt with Nike and Jordan brand. And All Star Weekend activation, I think, is a great example of the power of our partnership. We have a lot of faith in Elliot and his team. The actions they're taking we think are good for the brand and the overall marketplace and longer term for us. As we rebalance our portfolio to make way for the future innovations. And feel good about what's in the pipeline, I'd say, at a high level. And there's been some recent wins like the Black Label pack, the Jordan retro 12, etcetera. So So we did return to allocation growth in the fourth quarter, but now we're actually really focused on longer term strategies and growth plans between our two companies, which we're quite excited about. I might just add though that, of course, we're also leaning into our wider product portfolio which still remains very much in focus for us.

It's reflected in what our consumers want, which is seeing Foot Locker as I guess all things sneakers we like to say and we've seen double digit growth in the rest of the portfolio led by Adidas, New Balance, Asics, On, HOKA, UGG, Timberland. So all drove really positive comps in the quarter. So we're balancing that well, I would say. I'll ask Frank to add a little bit more about NIKE.

Sure. Yes, as Mary said, very happy with the partnership and the level of engagement with NIKE As we said in the prepared remarks, we did return to allocation growth in Q4 and you saw that read through in our results in the Jordan brand and our launch business So we really do consider the business to be reset, so to speak. This year, as you mentioned, we're really focused on optimizing our merchandise mix and do see sequential top line as well as gross margin recovery with the NIKE partnership. We're definitely supportive of the actions being taken on those big three basketball classic franchises and we're actually quite bullish on some of the innovation in storytelling that's coming in the latter part of the year and think that we'll be net benefactors of that delivery. Meanwhile, very excited about the future in terms of innovation. [indiscernible] [indiscernible] been well received by the consumer. Basketball, of course, continues to see diversification Joss, Sabrina, Book, Kobe all performing well with consumers. And then the Max Air franchise, again, we're launching DNA later this week and super excited about our go to market plans globally for that franchise. So we're very clear eyed and working closely with our NIKE partners in 2025 to improve the performance of the business, more importantly the long term outlook is very strong with our partners there.

The next question will come from Michael Binetti with Evercore ISI. Please go ahead. So as we look at the guidance you just gave, the at the high end this year, the algorithm is 2.5% same store sales growth. [indiscernible] EBIT margins up 60 basis points on that level of comp SG and A levering 30 basis points. Let me see the first quarter and the first half are below that rate, but is that is that a rate that you could look at and say this is the high end of this rate you've referred to a couple of times as normal. Is that that a normal algorithm? Can you do 60 basis points of EBIT on a two to three comp going forward? And should we think about it for next year for 2026 when the consensus model has think only 30 basis points of total margin expansion, particularly considering I think with this year's guidance gross margins will still be more than 200 basis points below 2019 levels.

Michael, this is Mike. We do feel comfortable with that algorithm, especially in the next few years as we're continuing to recapture some improvement in margin that we owe. We'll continue to make SG and A leverage as we continue to focus on our cost structure. And I think the other thing that will be supportive of that Mary alluded to it in her earlier comments is just the health of our store fleet. And the work that we've done to have a tighter healthier store portfolio But the high end of that comp range and the 60 basis points of EBIT rate growth, we do feel comfortable with.

And if I let me ask you about the stores. You're going to add you're going to refresh 300 more this year. We heard the reimagine plan.

I'm curious, it seems like they're fairly low touch, not disruptive refreshes. I think the capital was quite low and you didn't have to have them closed for long. Why slow to 300 this year from 400 given the over 2,000 stores globally and I understand that brand standard math you're doing as we think about more of the fleet being refreshed and reimagined. [indiscernible] talk about the bottom part of the fleet What do you think you need for the stores that aren't eligible for refresh or won't be converted into reimagine. How do you think about what to do with the bottom part of the fleet to help it contribute more to the overall P and L of the company going forward? Yes. So Michael, this is Mike.

A couple of things tied to that. One is the 800 stores from a refresh standpoint that we've completed by the end of this year are really the store portfolio or the store composition that we feel comfortable can generate the returns that we committed to within our investor profile. As we look forward with the reimagined concept, we do have stores that would have been more costly to do from a refresh standpoint and are in markets or locations that are worthy of the full reimagined scope. I think as we think through our broader portfolio, one of the things that we're really pleased with is when you look at I think 2019 versus 2024, we have about 20 points more of our penetration into the higher end AB malls and off mall and we've really reduced our exposure into the the underperforming or the lower tiered malls. So again, I'd like you to take away from this that we feel really good about the construct of our real estate portfolio, especially with the remaining actions we take to close another set of stores this year.

Okay, guys. Thanks a lot. Appreciate the detail. The next question will come from Janine Stitchter with BTIG. Please go ahead.

Hey, good morning. Thanks for taking my question.

As a follow-up to the real estate piece of things, sounds like you're reallocating CapEx to new concepts, refreshes and then pulling back on some of the IT spend. You elaborate on the areas that you're pulling back in and how you think about the tech investments or IT investments that might be needed over the medium term?

Janine, this is Mike. So we are Foot a technology perspective, very much maintaining the consumer facing side of our technology investments and the [indiscernible] aspects that would be tied to the digital experience and the mobile app and setting up FLX in EMEA Foot example. So we're very focused on that. We do have core technology pieces that we are really moderating or adjusting the timing of that, just acknowledging that we do have these investments that are paying back quicker that we want to lean into. So I would I'd like you to take away from this this the reinvestments or the reallocation into more consumer facing and strong cash on cash return projects and an elongation of the technology investments that are more sort of back of house related.

Great. And then maybe just on WSS. Obviously, the consumer has been pressured there and you're pulling back on the store growth. What do you think is the fix there and what would it take for you to reaccelerate the unit growth there?

Yes, this is Frank. I'll jump in there. So first of all, I think the team has been very focused on the consumer and been sensitive to some of the conditions that they've been going through. Prolonged inflation, particularly in the state of California where more than two thirds of our store fleet lies, but also just some of the recent dynamics going on with the consumer, which has caused them to be even more cautious So we are doubling down on our value proposition. So really recommitting to sub-one hundred dollars footwear, really tapping into some of the passion points of global football, but also acknowledging workwear is a key category and instrument of growth for us. We're doing a lot of work on the merchandise mix and our pricing strategy. We continue to connect with the consumer at a very local level. So being very prudent as we talked about in terms of capital allocation. So really only one new store in 2025. And our focus is really on improving the profitability and productivity of our existing [indiscernible] Long term, we have a lot of faith in that Hispanic community in terms of what they mean to the marketplace and their purchase power.

And so we're going to stay the course and work through this.

Great.

Thanks so much. The next question will come from Jay Sole with UBS. Please go ahead. Great. Thank you so much. Maybe if you could elaborate a little bit on what you're seeing in Europe in Yes, I can jump in. It's Frank again. So definitely, it's been a challenging macro both from an economic as well as a political environment, very choppy and volatile say the least. 2% comp gain in Q4 and comp positive sales for the year with good market share gains in the footwear category. We do feel that while it was relatively promotional in both footwear and apparel, we are seeing channel inventories clean up and directionally headed in the right direction. We also, as Mike mentioned, have an aggressive refresh program in 2025. So over two thirds of the refreshes will happen in West [indiscernible] cash on cash returns in that marketplace. And then meanwhile, we're working very close [indiscernible] footwear and apparel to excite the consumer and make sure our inventory stay fresh and our margin in top line continues to move in the right direction Got it. And then could you just clarify what the comments on the guidance for the first half of the year?

How should we think about Q1 really in that context? Jay, this is Mike.

So I think from the really articulating that we think the first half in general is going to be flattish overall from a profit standpoint to what we had versus last year. In Q2 from a year over year standpoint would benefit from the FLX charge not anniversarying, which is worth $0.09 $0.09 So that does put some pressure on on how we're thinking about the first quarter.

Got it. And then is there a difference in the sales growth expectation for Q1 versus Q2?

I would say across if you think about the guidance of the first half being at the lower end, and the second half being at the higher end of our guide, We would expect somewhat of a ramp across the Q1 to Q2. Within that. Thanks, Jed.

This concludes our question and answer session. I would like to turn the conference back over to Ms. Mary Dillon for any closing remarks. Please go ahead.

Thanks to everybody for joining us today. We remain confident that our strategies and actions are putting Foot Locker on the continued path towards sustainable growth. I want to extend my thanks to the entire Foot Locker team Foot our global Stryker community to those working on distribution centers, to our headquarters for their dedication, passion and commitment every day. We look forward to updating you on our progress next quarter and thank you.

The conference has now concluded. Thank you for attending today's presentation.