Q2 2021 Foot Locker Inc Earnings Call
Good morning, ladies and gentlemen, and welcome to foot lockers second quarter 2021 financial results Conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. This conference call may contain forward looking statements that reflect management's current views of future events and financial performance management undertakes no obligation to update these forward looking statements, which are based on many assumptions.
And factors, including the impact of the COVID-19 effects of currency fluctuations customer preferences, economic and market conditions worldwide and other risks and uncertainties described more fully in the company's press release and in reports filed with the SEC.
Including the most recently filed Form 10-K or Form 10-Q any.
Any changes in such assumptions or factors could produce significantly different results and actual results may differ materially from those contained in the forward looking statements. Please note that this conference is being recorded.
I'll now turn the call over to Jim <unk>, Vice President corporate Finance and Investor Relations. Mr. Lance you may begin.
Thanks, Operator, welcome everyone to foot locker, Inc, second quarter earnings call.
As described in today's earnings release, we reported second quarter net income of $430 million compared to net income of $45 million for the second quarter of last year and net income up $60 million for the second quarter of 2019.
On a per share basis second quarter earnings were $4 nine <unk>.
Compared to earnings per share of 43% last year and earnings per share up <unk> 55 for the second quarter of 2019.
During the second quarter of 2021, the company recorded adjustments to earnings including $303 million of non cash gains related to our minority investments of which $290 million was related to a higher valuation for the companys investment in goat.
And a $39 million charge was due primarily to the impairment review up foot action.
On a non-GAAP basis earnings were $2.21 per share up over 200% compared to earnings per share of <unk> 71 for the second quarter of last year and compared to earnings per share up 66 cents for the second quarter of 2019.
Unless otherwise noted the figures and rates mentioned during our call today will be based on non-GAAP results a.
A reconciliation of GAAP to non-GAAP results is included in this morning's earnings release.
We will begin our prepared remarks, with <expletive> Johnson, Chairman and Chief Executive Officer.
Andy Gray.
<unk>, Vice President and Chief Commercial Officer will then provide additional insights into the business drivers in the quarter.
Andrew Page Executive Vice President and Chief Financial Officer will then review, our second quarter results and provide guidance for the current fiscal year.
Following our prepared remarks, <expletive> and Andrew will respond to your questions.
With that I'll now turn it over to Derek.
Thank you Jim Good morning, everyone and thank you for joining us this morning.
We are pleased to report that our momentum continued into the second quarter, leading to excellent top and bottom line results that reflect the health of our category. The deep engagement, we have with our customers and the strategic nature of our vendor partnerships.
The broad based growth was driven by strong performances in womens and kids footwear, coupled with strong demand across apparel and accessories.
In addition, with further gains in our inventory productivity and meaningfully lower levels of promotional activity, we were able to deliver significant margin gains and a truly impressive bottom line performance.
For the second quarter, our global fleet was opened for approximately 94% of possible operating days with temporary closures in Canada certain markets in Asia and Germany.
With economies reopening to a greater extent throughout most of the markets in which we operate we saw low double digit lift in traffic compared to fiscal 2020, which demonstrates the ongoing importance of our stores, where our customers enjoy spending time after connecting with us digitally.
Together with the strength of our stores our digital channels also drove important connections with our customers.
Our digital sales penetration rate was 21% normalizing from the peak levels. We saw in 2020, while remaining well above 2019 levels of <unk>.
And we expect to continue going forward.
I am proud of the great progress our teams have made against the ongoing challenges created by the COVID-19 pandemic delivering great customer experiences, despite lean inventory levels and temporary store closures in certain countries.
Turning now to some highlights of our three geographies.
In North America, our kids foot locker and Champs sports banners led the way with double digit comp gains on top of last year's double digit increases.
Our U S fleet was opened close to 100% of the possible operating days, while our Canadian business was impacted by closures in Ontario, resulting in doors being opened approximately 70% of possible operating days.
We are also making meaningful progress on our North America portfolio of fleet transformation strategy as.
As we discussed last quarter, we made the strategic decision to wind down their foot action banners by the end of fiscal 'twenty 'twenty two.
And focus our resources on our core concepts.
We just completed our first foot action store conversion reopening it as a foot locker format.
And we have approximately 50 more conversions planned for the back half of the year, along with 130 foot action store closures.
In EMEA pent up demand drove growth of stores reopened across all countries, leading to a double digit comp gains in foot locker Europe.
Altogether, our EMEA a fleet was opened 87% of possible operating days in the quarter compared to 70% in the second quarter of last year and a meaningful improvement from the 39% in the first quarter of this year.
Our APAC region delivered another solid quarter also overcoming challenges related to Covid with the fleet opened approximately 80% of possible operating days compared to over 90% in Q2 last year.
But even with the decline in operating days, we saw 30% comp increase in our Asian markets in the mid single digit gain in the Pacific region.
We continued to make progress on our expansion strategy within Asia in the second quarter.
We launched our local foot locker website in South Korea, which will help us connect with our customers and grow our social media following and create a stronger omnichannel business in the market.
We also opened two new stores in South Korea, and one store in Singapore.
In addition, we are excited to announce that we have signed a licensing agreement to enter the Indonesian market in partnership with map active the leading brand commerce and athletic retailer in Southeast Asia.
We expect to launch the local foot locker website and opened two foot locker locations, our power store and of course store. This year with the first stores slated to open by early Q4.
Turning to an update on F. L X, we continue to see our membership program gaining traction as enrollment increases.
We finished the second quarter with over 25 million members up from over 20 million members at the end of the first quarter.
We are excited about the momentum and engagement in the program and the overall benefits it will provide to our business, including higher average spend per members versus non members.
It's worth noting that members spent over 75% more than non members in the second quarter as their average order values were approximately 10% higher than non members and they shop more frequently at our banners.
We are excited about where F. L X is going and we will continue to create new features and evolve the customer experience for members within existing markets. While also working to launch the program in additional countries, where we operate.
Overall these metrics are why we are optimistic about the strength of our portfolio the power of our assortments and the loyalty of our customers.
Andy will provide more detail around product highlights in the quarter and what we see in the pipeline for back to school and more broadly in Q3.
Before he does I'd like to spend a few minutes discussing our recently announced agreements to acquire Ws S and Atmos and how we expect the addition of these two businesses to foot locker, Inc. Family will advance our four strategic imperatives.
You may recall that on numerous occasions, we have articulated our commitment to our four strategic pillars in order to accelerate growth and drive greater value for our stakeholders.
First elevate the customer experience.
Second invest for long term growth.
Third drive productivity.
Fourth leverage the power of our people.
The acquisitions of W. S S. The atmos fit our strategy to a T. While also tying back to our purpose to inspire and empower youth culture and strengthening our connection to the sneaker community.
Each transaction will be accretive create disciplined growth and enable us to invest in platforms that will maximize value per foot locker shareholders.
As we discussed when we announced the two transactions. The addition of Ws S. N Atmos to our brand portfolio will diversify our store footprint and product mix provide access to complementary and differentiated customer bases.
And accelerate our growth both in North America and internationally.
Moreover, together these acquisitions will expand our ability to service the entire retail price value spectrum.
Today, we would like to provide additional detail on how we expect these two terrific businesses to deliver significant financial benefits and drive additional value for shareholders.
Starting with Ws S. The management team has built a strong and scalable business model led by their off mall real estate strategy.
Full family offerings focus on the Hispanic customer and the commitment to elevating the communities that it serves.
We see a path to approximately $1 billion in sales in the next five years from the $425 million in fiscal 'twenty 'twenty drew.
Driven by the differentiated Ws S. Consumer concept that we can bring to new U S markets and favorable future demographics of the United States marketplace.
In addition to market expansion opportunities. We also have identified both revenue generating an operating cost synergies.
Our company's expertise in private label apparel design and sourcing.
Along with the utilization of our team addition speed to market apparel facility present opportunities to generate incremental apparel sales for WSI, yes.
Our company will also deliver incremental supply chain capabilities and capacity along with shared services operating synergies across the business.
WNS is also well positioned for operating margin enhancements in light of its full family offering that increases basket size, a successful labor model that values outstanding customer service and expertise in choosing high potential store locations that are well positioned to succeed.
Turning to Atmos, we're excited to add this premium globally recognized brand into our portfolio.
Over the past two decades homeotherm, the founder of Atmos and his team have built a digitally led and culturally connected premium lifestyle brand that sits at the center of Sneaker culture in Asia and beyond.
This acquisition will represent a highly strategic entry point into the important Japanese marketplace with immediate scale as we continue our expansion across Asia Pacific and tap into youth and sneaker culture across the globe.
As many of you know Atmos has a long and storied history of iconic collaborations with a variety of strategic brand partners to create unrivaled hype in our industry.
They are also best in class when it comes to retail design, an exponential stores located in key markets and shopping districts that serve as inspiring and critical touch points and the omni customer journey.
Yes, most generates over 60% of its revenue from their digital channels and has a strong global following across social media platforms.
We expect low double digit sales increases from the brand as we continue to drive growth in the Japanese market to the core business and key concepts like Atmos pink its premium female focused offering and vendor partner doors as well as growth in other Asia Pacific markets and select local.
<unk> in the U S.
Both Ws S in Atmos or high growth businesses, we expect that each will generate low double digit sales growth annually over the next five years that will in turn be accretive to the bottom line.
Andrew will provide some additional color on the potential accretion in his remarks.
We are excited about welcoming both ws S and the apples to the foot locker, Inc family and look forward to integrating these businesses for the benefit of all stakeholders.
One other call out I would like to make is regarding your investment will go.
During the quarter go close to $195 million series F round of funding again, confirming the market's confidence in the broader sneaker category.
We continue to be excited about good success as they expand into new categories, such as luxury apparel and accessories and we'll continue to look for ways to work together and expand the ecosystem.
In short the strength of our business has enabled us to invest in profitable growing businesses and deploy our capital effectively to drive shareholder value.
Andrew will drill down into the numbers and discuss capital allocation and our outlook in a moment.
Before he does here's my perspective, as we look to the back half of the year.
We have positive momentum coming off the strong results from the first half.
That said, we're still facing several macro level issues from the global pandemic to the knock on effect it is having in their supply chain.
We are also working closely with our strategic vendor partners to ensure our continued access to product amidst the COVID-19 outbreak in Vietnam and other supply chain related headwinds.
But for those things that we can't control. We believe we're in a very good place to deliver positive results in the back half of this year.
Our product pipeline, which continues to be very strong is resonating well with our consumers.
We anticipate the culture of basketball will continue to be a key revenue driver in the third quarter.
Seasonal offerings will also be very important as consumers look to diversify their footwear purchases.
Lastly, apparel trends continue to be very favorable as we enter back to school in the fall season.
And as we consider the opportunities for back to school in comparison to the delayed back to school season last year.
A more normalized cadence this year presents an opportunity to capture more of that demand earlier in the quarter.
That said, we are keeping a close eye on possible disruptions caused by the evolving COVID-19 situation.
We continue to monitor the temporary store closures across the countries in which we operate and we'll adhere to government mandates.
We look forward to getting our store fleet back to full strength and meeting the pent up demand, we expect to see from our customers as we fully reopen our stores.
Our financial position remains strong our vendor relationships are very strategic in nature, and we continue to obsess around our customers, whether it's through our digital channels, social media F L X or an in store customer experience.
I want to express my Thanks to every team member at foot locker incorporated it is their dedication and hard work that made these outstanding results possible and will enable us to continue to drive our business forward and fulfill our purpose to inspire and empower youth culture.
With that I will now turn it over to Andy.
Thanks <expletive>.
Good morning, everyone.
Our second quarter results continue to showcase that our strategy to strengthen the relationship with our current customers and bring new customers into our business are working.
The three key objectives here are to maximize our product leadership and diversity of brands.
To utilize our global scale and investments to elevate our store and digital experiences to get great product into the hands of our consumers.
And to continue to double down on our commitment to the communities we serve.
And we saw broad based growth this quarter by Boeing those objectives.
Our footwear business increased low single digits, our apparel and accessories businesses were both up double digits with both families of business also up double digits compared to 2019.
We saw consumer diversity across departments and our total men's business was relatively flat and we saw acceleration in women's and kids.
Encouragingly Kid had the largest gain as we continue to recruit and bring in the next generation of sneaker head to stock their late long journey with us.
We come to a basketball led by the key Nike icons and new additions from Adient, asking you balance continues to create excitement and drive momentum.
Kia strength in women's and kids more than offset a mid single digit decline in mens it was going up against a double digit comp of last year.
Additionally, we brought new consumers to our business with an increased focused on the seasonal category delivering a high double digit increase with gains in Crocs, Inc, and birkenstocks.
Along with an expanded balkanized offering and vans and converse showcasing the variety our consumers want on their feet.
Another area of our business that continues to excite us and gain momentum is apparel, which was up double digits to last year and 2019.
Mens womens and kids all delivered gains over 20% and again, our kids business had the largest increase as we bring in the next generation for apparel as well.
And distinction to our Assortments, we are thrilled to continue working with all of our partners to deliver a strong pipeline of exciting exclusive product concepts that resonate with all of our consumers.
A big part of how we bring energy inbreeding.
Recent examples would be our celebration of the 25th anniversary of the Griffey, one with Nike.
Our anti Nash Oh D I dream about summer content, featuring unique executions of their key iconic silhouettes.
And our crocs and parkey animals concept, where we partnered with rone English to re imagine their icon for summertime.
All of these programs are significant in terms of scale and consumer engagement.
Our powerful consumer content offense continues into fall, including Puma, and Melo ball, new balance and Louis Deguzman bands and kids of immigrants and many more.
In addition to our product content, there's a lot to be excited about for fall.
The culture of basketball momentum continues.
We are continuing our seasonal expansion with an increased focus on boots and please to maximize the season ahead.
And we have a very strong pipeline of product in inventory and autonomy.
What is new to our business will be the launch of our own brands to maximize the ongoing momentum in the category.
These will feature brand like locker and Koozie as well as exclusive partnerships with pacemakers and celebrity curators like Dawn C and melody Asami.
I'm also very pleased to see the results of our commitment to building community and driving meaningful and lasting change for our consumers.
We are building and enabling community in many ways. Both through the continued expansion of our community stores and you offence to ensure we're more deeply rooted in the neighborhoods we serve.
And the continued rollout and expansion of our <unk> membership program, where.
Where we see significant runway to grow our 25 million member community as well as driving engagement and incremental spend through value added enhancements and meaningful benefits that excite our consumers and drive leadership in the industry.
Finally with lead we continue to fight ratio inequality and injustice.
We addressed our first year in June with a statement on our 200 million dollar commitment.
But to be more specific year for the quarter, we expanded our associate scholarship program and completed our first summer internship bridge program focused on our Black associates.
We launched the designing with solar program with painful and new balance which creates opportunity for under represented voices in the industry.
And we continued to bring in black owned brands and concepts to give them a platform to connect with our audience.
We have featured 20 brands since announcing this program with 25 more planned for the year.
We are extremely dedicated to this initiative and we will continue to drive meaningful and lasting change across our company and within the communities we serve.
As we push our consumer lane offense forward our strategy will continue to be the combination of product leadership and diversity enhanced only expediencies and our focus on community and purpose that will guide our actions and make the difference and how we lead this industry.
Let me now pass the call over to Andrew.
Yeah.
Thanks, Andy.
It is my pleasure to join you this morning to discuss our second quarter results.
Before I begin.
I would like to note that in addition to comparing our results for last year.
Also weapons comparisons to the second quarter of 2019, where thats helpful.
Now, let's discuss our second quarter results.
Starting with the top line, we delivered a six 9% comp gain on top of the 18, 6% gain in the second quarter of last year.
Along with the strong demand.
<unk> on more full price selling combined with our disciplined expense management.
Non-GAAP earnings per share of $2 in 'twenty one.
An increase of over 200%.
Taking a look at the second quarter maids comp gain was up over 50%.
June which was up against the initial reopening last year was pressured the most down high single digits why July down it was down low single digits with momentum improving as we moved through the month.
Breaking down our performance by region, North America experienced pockets of growth on top of robust comps from the second quarter of last year.
Kids foot locker led with comps over 20%.
Champs sports, followed with a low double digit comp gain.
Foot locker posted a mid single digit comp gain.
Foot action in a wind down mode closed the quarter down low double digits.
But lots of Canada posted a high single digit comp decline as we continue to face temporary store closures in key market.
East Bay was down over 30% for the quarter.
As a digital only banner East Bay did not benefit from store openings and was up against a double digit comp gain in Q2 of last year.
Foot locker Asia deliberate a roughly 30% comp gain while foot locker Pacific increased in the low single digit range.
Turning to Europe.
Based on easy Covid restrictions foot locker Europe posted a low 20% comp increase.
Sidestep, which experienced the most store closures during the quarter decreased low single digits.
By channel the strip than our comp sales this quarter was driven by our stores.
Which increased 28, 4%.
Let me remind you that our fleet was opened 94% of potential operating days in the quarter versus approximately 70% last year.
Our direct to consumer channel returning to a more normalized level accounting for 21% of total sales for the quarter.
Down from 33, 2% last year.
But up from 14, 3% in the second quarter of 2019.
Yeah.
Reflecting on the more limited promotional environment.
Average selling prices were up mid single digits in the quarter.
While units were up low single digits.
In addition, the highest sales penetration in our stores led to more full price selling.
Moving down the income statement.
<unk> margin was 35, 1% compared to 25, 9% last year.
When compared to a more normal Q2 of 2019 gross margin improved an impressive 500 basis points.
The trends we experienced in the first quarter continued in the second quarter with the combination of robust demand and fresh and named inventory driving meaningfully lower levels of promotional activity.
Our merchandise margin rate improved 870 basis points over last year, and a 170 basis points over 2019.
Driven primarily by the meaningful reduction in March.
Looking ahead, we expect the promotional environment to remain favorable through most of this year, but to a lesser extent than what we experienced in the first half.
As a percent of sales, our occupancy and buyers' compensation costs leveraged 50 basis points over Q2 of 2020.
330 basis points over Q2 2019.
This is inclusive of approximately $6 million of Covid related rent abatements in the quarter.
Which was unchanged compared to Q2 of last year.
Our SG&A expense rate came in at 19, 8% of sales in the quarter.
We returned to more normalized store operating levels.
This yielded 120 basis points of deleverage over last year, and 240 basis points of leverage compared to 2019.
In addition to careful expense control, we received approximately $4 million in government subsidies in the quarter.
Which is down from the $17 million, we received in Q2 of 2020.
We also incurred $4 million of lower PPE expense.
And bonus expense came in 40 basis points lower.
For the quarter depreciation expense was $48 million.
From $44 million last year.
Interest expense was $2 million.
Two last year.
Our non-GAAP tax rate came in at 27, 4%.
Below last year's rate of 37%.
The improved rate in the current quarter reflects the lower proportion of non deductible items on the overall rate.
Turning to our liquidity position, we ended the quarter with $1.8 billion of cash an increase of $472 million compared to Q2 last year.
Primarily driven by a higher inventory turn.
We currently have no outstanding borrowings on our $600 million credit facility.
At the end of Q2 inventory was down nine 5% to last year.
First is total sales increase of nine 5% as strong demand outstrip the increase in receipts during the quarter.
On a constant currency basis inventory was down 10, 4% while sales increased seven 3%.
We invested approximately $36 million into our business in the form of capital expenditures during the quarter.
This funded the opening of 16, new stores as well as the remodeling or relocating of 23 stores.
We also closed 57 stores in the quarter.
Primarily in the U S, leaving us with 2911 company owned stores at the end of Q2.
For the full year, we now expect to open approximately 120 stores.
Remodel or relocate 165 and close 345.
These amounts reflect about 190 foot action stores, we plan to close our reposition in 2020 one.
Looking forward, we now expect to invest approximately $260 million in capital expenditures this year.
Down slightly from our prior guidance of $275 million.
However, this number and the fleet update do not reflect any impact related to our announced acquisition of WSI and Atmos.
As <expletive> mentioned, we are excited about the strategic potential that both assets going to the foot locker, Inc family.
They will provide us with the opportunity to expand into new markets customer segments and price points.
As well as deepen our relationships with existing vendor partners create new relationships with new vendors and diversify our retail footprint.
In addition, while both transactions are about growth.
We also see opportunity for cost synergies with the Ws EFS transaction.
More specifically in 2022, we expect that we will begin to generate approximately $10 million in annualized cost synergies by leveraging our supply chain and operating capabilities.
Based on the expected growth trajectory for both WSI and Atmos we.
We expect each of these businesses to achieve low double digits to mid teens EBITDA margins over the next five years.
As we previously communicated we anticipate both W. S S and atmos will be accretive to foot lockers earnings for fiscal 2020 one.
We anticipate that accretion on an annualized basis will be in the range of 44 to 2070.
In light of these strategic investments we wanted to use this opportunity to reiterate our approach to capital allocation.
While we made adjustments to our strategy over the past year as we tackle the effects of the pandemic on our business. We have historically maintained and communicated our balanced approach that includes investing in our business to drive growth, while also returning value to shareholders through dividends.
And opportunistic share repurchases.
What you have seen so far this year, it's a reflection of exactly that approach with a combination of thoughtful organic investments in our business and highly targeted M&A activity.
At the same time, we continue to focus on delivering meaningful returns of cash to our shareholders through our dividend and share repurchase program.
We believe the 50% increase to our quarterly dividend, which we announced earlier this week signals our boards confidence in the business and our financial strength.
To date in fiscal 2021 we have paid out $42 million in dividends and repurchased approximately 745000 shares for $41 million.
Going forward, we and the board expects to continue with this focus capital allocation strategy designed to maximize shareholder value.
Finally, we are providing guidance for the current fiscal year.
As a reminder, our general practice is to only provide annual comp sales and EPS outlook and not quarterly guidance.
Also please note that this color excludes any impact of the acquisition they had not yet closed.
And that we are still operating in an uncertain environment and seeing shut downs in certain markets outside the U S alone with changes closer to home due to the COVID-19 variant.
For fiscal 2021, we remain optimistic and expect to deliver a low to mid teen increase in comp sales.
From a cadence point of view keep in mind that Q3 is up against a strong back to school period and some of the enhanced government assistance programs are scheduled to end.
We are expecting the gross margin rate to be up 490 to 510 basis points for the full year versus 2020 more.
Mostly driven by a more rational promotional environment.
Our SG&A expense rate is expected to leverage between 40, and 60 basis points year over year.
In terms of depreciation and amortization expense, we expect it to be approximately $185 million to $190 million.
Lastly, we expect our full year effective tax rate to be in the range of 28% to 28.5%.
We expect our non-GAAP earnings range to be approximately $7 to $7.15 per share.
This guidance reflects the strong performance in the first half of the year.
And our optimism around the back half of 2021, while recognizing that we are going up against more normalized store operating days versus last year.
Before we open up the call for questions I want to emphasize that our team is focused on execution and delivering strong results.
Our financial position is strong and it allows us to remain flexible as we seek to deliver against our strategic plans and drive shareholder value.
With that operator, please open up the call for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session. If you'd like to register a question. Please press Star then the number one on your telephone keypad.
Your question has been answered or you would like to withdraw your question. Please press Star then two.
If you are using a speaker phone. Please lift your handset before entering your request once again, if you'd like to register a question. Please press Star then the number one on your telephone keypad.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from Adrian <unk> with Barclays. Please go ahead.
Yes, good morning, and congratulations stellar quarter and very well done.
Thanks, Andrew.
My first question is going to be for you and I'm wondering you know what.
That future ticket price initial ticket like for like increases no one's really done it yet, but that's on the comp supposedly for spring of 2022 wondering if you're seeing that in your discussions with your vendors and then Andrew.
For you yes.
The mid tier low double digit to mid teen EBITDA margins over the next five years with W. W. S N Atmos.
Clarifying that that segment margin can you remind us or help us out with where they currently sit on an apples to apples basis.
You very much.
Thanks, Andrew I'll tackle the first question on ESP and future ticket prices.
Clearly theres a lot of inflationary sort of tendencies in the marketplace right now that we're all reading about where we're working closely with our vendor partners as we look at.
As we look at pricing you know obviously, we're a house of brands. So they've set a manufacturer's suggested retail price and we adhere to their their their pricing policies and we ultimately figure out what the right prices for our customer and we.
Price the shoes Accordingly, you know again the marketplaces.
You know very resilient when it comes to our customer is very resilient when it comes to pricing. So again as we think about spring as we think about the flow of product.
Well that there will be some price increases you know one of the things that we're looking at as Andy talked about adding a private label product because we're looking at all of those input costs and making sure that we get a price right out of the gate. So you know, it's a fine balance point with our customer but clearly the.
Supply chain headwinds in some of the freight headwinds, causing all of the input cost to be looked at very closely but again, we try to make sure that we kept things price the price value is correct for our customer.
I'll turn it over to you Andrew.
On the margin question for WSI and Atmos.
Thank you Adrian Thanks, Thank you as well for the margins that I reflected for WSI and Atmos those things those are.
The business unit margins that we expect them to continue to run obviously those business units will be.
Rolled up into the regions that they operate in but the margins that we gave you.
What we expect those businesses to run and they're in.
Are there discrete operating verticals right now going into the pre acquisition, where we're looking at similar margins now.
So double digit to mid teens for those businesses right now and we expect to be able to.
Continue to to have those businesses run at that margin and hopefully be able to contribute.
I've been up even more.
Fantastic, that's the Elektron Baptist dossiers that and great job.
Thanks Adrian.
The next question comes from Kate Mcshane with Goldman Sachs. Please go ahead.
Hi, Thanks, good morning.
Wondering if you could talk a little bit more about what is driving the strength in women's in the quarter were there any new launches are brands that were driving this and how much do you think might be from market share gains.
What I would say that I think that we're finally paying attention to women's in a better way to our vendor partners are we're doing a better job representing a digitally and speaking to her through our social channels and doing a better job in stores and the culture of basketball that Andy referred to has got some great very female.
Friendly silhouettes handle the adult because bad well accepted AJ ones have been well accepted by her.
We had a great run with with some of boots and other slides.
Slides that are very much a female led attack in the summertime.
Our crop business you know that there's just a ton of things that are appealing to her right, though in the sneaker world and we've got a great assortment that our team has put together but.
I'd like to give our team some credit that we're really doing a great job thinking about her trying to to better serve her both digitally and in store, but I think we're taken some market share I think she is very comfortable in and sneakers and I think we've got a great assortment for.
Okay, Great and then just as a second question around inventory I know you highlighted the supply chain challenges in the previous question with regards to increasing price, but just in terms of what you're getting into the store and how you're managing inventory as we go into the back half of the year.
What are some things that you're doing to make sure that you have enough in the store and you're limiting out of stocks.
We're working really closely with our vendor partners Kate.
Clearly the the.
Vietnam will have a longer term knock on effect you know most of the product for the back to school season in early holiday season has certainly built in on the water and.
It will be available and our team has done a great job, where we had a really strong quarter. Obviously in Q2, we had a strong receipts quarter and.
We over received at our original plan and I guess the good news is that we oversold our original sales plan. So we didnt make progress.
Our total inventory number but the team has got it lined up pretty well and again barring things that are completely out of our control.
We're in good shape for the back to school season and into the holiday season.
Thank you.
Thanks Kipp.
The next question comes from Paul <unk> with Citi. Please go ahead.
Hey, Thanks, guys question about the men's business just curious if you could expand a little bit on the comments about what you expect in the second half specifically in men's I think you mentioned basketball as a as a driver.
Curious if you could provide some color there also on the F. L X program I'm curious if you actually see a pick up in spend when somebody joins that program relative to <unk>.
Before they joined or is it that your you know higher spending.
Customers are the ones joining that program. Thanks.
Thanks for the questions Paul.
Hey, Andy highlighted the strength of the culture of basketball you know, it's always been one of the the quarter pulse of our business and our brands are bringing great heat and our team is doing a great job working with the brands to create some some really strong storylines through the basketball category.
The Nike icons that Andy called out or the strength of the business, but we saw some new products from Puma from new balance et cetera.
Even some small ddos product that falls into the cultural basketball that continues to fuel that men's business, but the culture of running is also very strong we've got a great running business. Our slide business was strong in the men's side of things.
Our seasonal business overall was strong. So you began to think that the men's business up against probably the most difficult comps from last year because of the way the launch cadence was a year ago, but still very strong and very relevant part of the business.
The good news is that our men's apparel continues to be strong as well and you know Andy talked about the strength of apparel across all genders, but you know it really continues to we continue to have the right uniform. This CIT as theyre going back to school and.
F. L X you know, we're not necessarily able to track the consumers before so identifying what their habits, where before F. L X is a little bit more difficult, but certainly we see an uptick in the amount of their spend and the number of times that they shop once they become become F. L X members. So again as we.
We reviewed all of those metrics you know, they're all very positive and the fact that we added 5 million more members in the quarter continues to show that the program is doing what we wanted it to its increasing our connectivity with our consumer it's commit it's increasing that engagement.
As we are able to round out the redemption center with more participation and engagement activities.
The the the F. L X program will just continue to accelerate.
Thank you good luck.
Thanks, Paul.
The next question comes from getting carve out and with Deutsche Bank. Please go ahead.
Hi, guys congratulations on the nice quarter.
Thanks.
You're seeing some really exceptional topline numbers I was wondering if you could maybe just sky you know how much do you think is kind of being impacted from stimulus and the child tax credit that hit in July 1st kind of their reopening in different markets like that and the strength of the product pipeline I understand that might be hard to answer, but just curious how youre thinking about those dynamics.
Well Jeremy Thanks for the question and that's one of the things that we talk about a lot in our organization I think all of those things contribute but the thing. That's most important is the art category right now.
Our category just has a lot of really interesting and really exciting products that are coming to market. So our consumer when they have cash in their pocket they've always.
<unk> tended to move towards towards our Assortments and in the product segment that we work in so you know certainly stimulus as a part of it. The fact that we were opened 94% of the days in store and our consumer still enjoy the connect with us digitally but they enjoy spending time in the stores. So we actually saw a traffic increase in Q2.
So again positive things as it relates to where.
We're we've got a product and you know we'll continue to.
Have some stimulus in the marketplace with the child care credit that pays out over you know on a regular basis. Some of the other stimulus programs I think Andrew mentioned or.
Our slowing down a little bit as we look forward, but again right now there's just a tremendous amount of heat around the category around the product and the product pipeline that Andy talked about coming into the back half continues to deliver that heat and I think the consumer has a desire to have the pool, the best new kicks on their feet.
As they go into this next season. So you know I can't really break it apart for you, but I do know that all of the things that you mentioned can be play a part in the success that we're having right now.
Got you and just a quick follow up you made a comment that you know you don't expect the promotional environment to stay as good as what you just experienced in Q2. It just was wondering if you can elaborate on that a bit.
Well, we've been able to run across all of our banners and across all of our geographies are at record low markdowns right inventories are low and lean and I think that's.
It will stay in the industry will stay fairly clean, but as you get into the holiday season, there's generally speaking more promotional activity out there.
As the seasons change people have to get through seasonal inventory. So we just we don't believe that will continue to run at these record lows I think it's going to be better than it's been historically, but I don't believe we will continue to run at these record lows and it will have to adjust to what's going on in the marketplace, but the strength of.
The product that I talked about again to the freshness that we're able to bring into the stores and our digital sites.
It certainly helps us.
To run low markdowns and cheap things less promotional as we as we think about our banners. We don't obviously speak for the others in the industry where we're.
I'm not sure where their inventory.
Levels are at and where their promotional activity is but we have to look at what's going on in the marketplace and be ready and be prepared and I think that's a little bit of caution around the promotional activity, but again I think it will be better than it's been historically.
Great.
Yes.
Yeah, I mean, let me, let me just add a little bit to that I mean, as you think about you know we watch trends as we went through the quarter end and to Dick's point.
Inventories are lean the market looks the market looks relatively clean. So we continue to think that the lean inventory in the <unk>.
Really really desirable product in the market is a strong data point that continues to allow us to to charge it to to be able to receive more full price, but if you think about back to school and had been a little bit more normalized back to school season kicking off this year, we did see some level of increase.
Promotional activity, but when a comparison basis not as much as we would've typically seen in prior years with the kick off go back to school. So that's another indicator that gives US reason to believe that you know the.
Promotional market will pick up a little bit, but we don't we don't anticipate it being at the levels that we've seen in prior years.
Great. Thank you so much.
The next question comes from Janine Stichter with Jefferies. Please go ahead.
Hi, good morning.
If you can talk a bit about morning, that'd be apparel piece of the business that you're seeing a lot of strength right now I'm curious if you could comment on how much you think is the broader environment versus maybe changes you've made to the assortment and then I think you've talked about some changes you've made to the way the product is merchandise and stores maybe go into that and talk about where you are in that transition. Thank you.
Thanks for the question Janine and it was really one of the strengths of the quarter and you know we've talked about this cosy comfortable a work from home school at home sort of look but because the truth is that we've got the uniform that the consumer our core consumers, where and you know it's T shirts and shorts in the summertime.
Fleece pieces always welcome it and I think the team has done a great job of bringing.
Fresh things to come to market and go into our stores and our digital sites and again I'll give our team a tremendous amount of credit they they've got the right assortment and importantly, we're doing a better job selling apparel in the stores.
For the longest time you know it was just sort of an add on.
The opportunity for our team, but now we've got people that are really focused on solid apparel. It's it's we're trying to make sure that it's a full service opportunity for us to help people get into the right pieces and you know when you think about some of the fleece pieces. There there at the same price level is a lot of our sneakers. So yes, I think the consumer is.
Acceptance of a casual lifestyle has always been there and our with our core consumer but this T shirt and short in fleece.
The uniform that they wear is even more pronounced and I think will be more pronounced as we go into this back to school season. So I think it's a combination of great assortment. The right product you know fresh goods and certainly a great job by our team to get a visually assorted represented in the stores and digitally and then our team in the stores.
<unk> actually been able to sell and doing a great job selling to our consumers.
Great and then maybe just on the seasonal piece have you said, how big that is in both annually and then maybe for the Q I'm sure. It over indexes in men and anything on how big you think that could or should be as part of the business.
We haven't broken it out in terms of percent of the business or total dollars Janine.
We've sort of proven that there is more.
Seasonal business to be done than we had historically done right. When you think about the cracks.
Stores that we've been able to tell and been able to sell a number of products in the store. The slides that have always been strong from Nike and Adidas and and other brands continued to accelerate the UGG slides and slippers that we sold over the summer.
Sets us up really well to get into what has been the traditional seasonal.
Assortment for us, which has been boots as we get into the back to school and holiday season, So that the consumer likes a lot of choices. We've got winterized sneakers that are part of the seasonal representation as well. So again I think we're really well positioned you know the the boots season.
Sitting here on August 20th I guess, and you know none of us are thinking about snow flying and sloppy streets, but our core consumer thinks of that seasonal shift and thinks about the changes to the footwear.
Again, I think we're really well positioned your vendor partners have done a great job and there'll be some great stories. This fall to tell around the seasonal goods.
Great. Thanks very much.
You bet. Thank you.
The next question comes from Jonathan Komp with Baird. Please go ahead.
Yeah, Hi, Thank you I wanted to just follow up when you think about the monthly trends Youre seeing could you share a little bit more maybe on a two year basis, if you're seeing stability.
Stability or any change in trend and any thoughts how we should plan.
The back half of the year or if it'll be.
By quarter or just any thoughts on sort of a two year trajectory of that business.
Well a lot of the numbers that we compare today, Jonathan where where you know where appropriate against 19, where appropriate against 20 and you know that the cadence is certainly a little more normalized as we think about the back to school season, and Andrew talked a little bit about it in his prepared remarks.
Last year at this time, there was still a lot of questions about whether kids, we're gonna be going back to school physically would it be virtual would it be some sort of hybrid situations. The cadence right now it seems to me that the back to physical school is going to be the the routine doesn't go into the third quarter for us know the masked man.
It has a whole different.
Ara or about the back to school season, but it does feel like kids are physically going to be back to school. So I think as we get into the normalization of stores being open kids returning to a more normal sort of cadence you know.
The the cadence will probably be probably be more representative of 4039, because there were still a lot of puts and takes with the openings and closings in the back to school season, but we do know that back to school is going to happen in August and September we know that that the holidays come the big six is gonna be here, we know crystal.
Since December 25th So you know that the consumers pattern I would put it more close to 2019, Jonathan in 2020, mostly because of the impact of environmental things the pandemic across our store fleet et cetera.
Okay. That's helpful. And then maybe just a bigger picture question on operating margin, 13% plus in the first half and it looks like you're guiding to double digits for the full year is that sort of the new rate that you expect to be at and maybe build from going forward or what are the.
Any puts and takes we should think about your ability to maybe hold on to that double digit operating margin.
Yeah, I'll I'll pass that over to Andrew He he talked a lot about margin in his remarks, probably add a little bit of color for you.
Thank you Jonathan I mean, you pointed it out and we are really really excited about our operational excellence that we've been able to pivot.
Pivot to as we went through the pandemic and coming out of the pandemic. Obviously operating margin is has been really enhanced by the elevated growth in our top line and we've been able to scale that topline growth.
We don't [laughter].
We don't anticipate.
Going backwards from our operational excellence and we're going to continue to drive where we think that you know really providing great products in the market the light in our customer engaging them across the entire spectrum will continue to bring our customers back to foot locker.
And then our performance from without vendor partners, and our cost structure and our performance from our our ability to deliver our SG&A. We can we feel confident that we will continue to drive operational excellence in those areas. Obviously, it's it's it's a it's a it's a tough market out there with respect to the uncertain.
Steve.
Around.
The Covid variant and how much it will impact operations and so that's always a challenge in a couple of them and those are some things that are out of our control <expletive> spoke a little bit about the ability to getting product out of Vietnam and how the coke.
Covid impact has impacted that as well, but you know as.
As far as going backwards for operational excellence, we do not anticipate that now.
Controlling those things in the macro environment will continue to pivot and come through those just as we did in 2020 or the first part of 2021.
Okay. Thanks for all the color.
Yeah.
Thanks, Jonathan.
Okay.
Time for one more question I think operator.
Yes. He final question comes from John Kernan with Cowen. Please go ahead.
Yeah.
Yeah, great. Thanks for taking my question and congrats on a really nice first half of the year I wanted to go back to the gross margin.
35% gross margin for the second quarter.
It's pretty incredible where relative to where the business has operated historically.
Merchandise margin has been tremendous can you just talk to.
Your view on the ability to maintain this level of inventory productivity, how we should think about merch margin in the back half of the year.
And you know your confidence in.
In drive in maintaining positive Thompson driving merch margin at the same time.
Yeah, I'll start and then I'll pass it over to Andrew.
Great question, and clearly 35% margin in the quarter was exceptional great work by the team I talked earlier about the record low markdowns that were running the lean inventory in all.
Our team has learned that we can be more productive with our inventory and when we see a turn in the way that it is that's a great sign that it's good for cash flow. It's good for our gross margin et cetera. So.
It's been you know a lot of real positives as we think about margin and you know I do believe that the marketplace is going to get a little bit more promotional so.
We will have to be prepared for that you know I think the that there is a lot of opportunities to continue to run a lean inventory with fresh goods, which ultimately helps that that gross margin and drive topline, which allows us to get the leverage so I'll pass it over to Andrew to wrap up but you know again, it's one of those challenges.
We've got to run at these levels.
Yeah. Thanks, Nick So John Thanks for the question as I talked about in our full year guidance I mean, I'm expecting margin expansion in the 490 to 510 basis points over last year. So with that you can you know you can kind of back into theirs we.
Spec.
The promotional environment to pick up a little bit in the back half and so you're going to see some deceleration in the back half compared to what you saw in the front half.
But when the full year, we're still expecting approximately you know approximately 490 to 500 bips of margin expansion compared to the prior year.
Sure understood certainly.
Okay.
Alright.
Yeah, we we kind of see that you know just based on where you're getting comps for the back half of the year.
And where you're guiding merch margin for the year and gross margin.
There would be some expansion in the gross and the merch margin in the back half of the year.
Just going back to the comp guidance and what's implied for the back half of the year can you talk to them.
Yeah. It feels like it's fairly conservative relative to where the business is running now is.
Is it just on your concerns about the stimulus that's maybe running its course or is there concerns on.
Supply chain and the ability to get product in the stores in the back half here.
Well again, John I would just remind you that we're up against a pretty good back half of the year last year, so from a comp perspective.
We're going to try to stack comps on top of each other as we've done.
The first two quarters, but you know comparing to 2020 continues to be difficult because of the openings and closings, but again, we feel good about the product pipeline that we've seen we feel good about the product that's flowing at this point and as we get later in the quarter. If there's impact on some of the closures in Vietnam that was.
Obviously, we'll we'll react to those to the best possible ways, but again.
Again, we feel good about the back half of the year. It's just a when you're up against things that are completely out of your control there there may be some caution.
Again, we feel good about the product pipeline, we feel good about the team that we've got in place then.
Our our piece of the supply chain continues to work as hard as they can to make sure that there are fresh goods available for our stores. So we feel good about the back half.
Yeah.
That's great. Thanks, <expletive> Thanks, Andrew.
Thanks, John Thank you.
This concludes the question and answer session I would like to turn the call back over to Mr. Lance for closing remarks.
Thank you for joining us today. Please join US again for next earnings call, which we anticipate will take place at nine a M on Friday November 19th.
The call will follow the release of our third quarter results earlier that morning, Thanks again goodbye.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.
[music].