Q4 2021 Foot Locker Inc Earnings Call
Right.
Okay.
Good morning, ladies and gentlemen, and welcome to foot lockers fourth quarter 2021 financial results conference call.
At this time.
All participants in a listen only mode.
Later, we will conduct a question and answer session.
This conference 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 COVID-19 effects of currency fluctuations.
My preferences.
Economic and market conditions worldwide, and other risks and uncertainties discussed more.
And economic and market conditions worldwide and other risks and uncertainties described more fully in the company's press release and reports filed with the SEC, including the most recently filed Form 10-K or Form 10-Q .
And then can you just touch.
Or factors could produce significantly different results and actual results may differ materially from those contained in the forward looking statements.
Please note this conference is being recorded.
I turn the call over to Robert Higginbotham, Vice President Investor Relations. Mr. Hagan, Boston you may begin.
Thank you operator, welcome everyone to foot Locker, Inc. 's fourth quarter earnings call as described in today's earnings release, we reported fourth quarter net income of $103 million.
Inclusive of the recent purchase of both WNS and Atmos compared to net income of $123 million in the fourth quarter of the prior year on.
On a per share basis fourth quarter earnings were $1 <unk> compared with $1 17 since the prior year during.
During the fourth quarter of 2021, the company recorded $72 million pre tax adjustments to earnings primarily including store impairments store closing costs, the write down of minority investments and acquisition related expenses.
On a non-GAAP basis earnings per share were $1 67, including a 20 <unk> gain and our retailers limited investment compared to $1 55 for the fourth quarter of 2020.
Unless otherwise noted the figures and rates mentioned during our call today will be based on non-GAAP results. A reconciliation of GAAP to non-GAAP results is included in this morning's earnings release. Additionally, we have a slide presentation posted on our Investor Relations website with highlights on the quarter, including some sales details typically cited on.
Our earnings call, we will begin our prepared remarks, with <expletive> Johnson, Chairman and Chief Executive Officer.
Andrew Page Executive Vice President and Chief Financial Officer will then review, our fourth quarter results and financial position in more detail and provide color on the 2022 guidance we issued in our press release this morning.
Following our prepared remarks, <expletive> and Andrew will respond to your questions with that I'll now turn it over to <expletive> .
Thank you Rob good morning, everyone and thank you for joining us.
This morning, we will review, our fourth quarter and full year results, including the progress we've made against our key strategic objectives as well as talk to some changes in our business and the strategies. We are accelerating that are well underway.
We closed out a record year by delivering solid fourth quarter results that reflect the ongoing momentum we have built in our business.
Our total sales grew by 6.9% this quarter and almost 19% in 2021 to approximately $9 billion the highest in foot lockers history.
We remain committed to our purpose to inspire and empower youth culture and further our connection to the sport and sneaker communities.
Throughout 2021, we made great strides to do just that by diversifying our product mix across brands and categories.
We also extended our distribution across channels and banners by enhancing our omni channel experience.
We broadened our customer base through acquisitions of scalable new banners to strengthen our portfolio of retail brands.
Starting with product, we know that our consumer demands choice across a variety of brands and categories. So we continue to work to broaden our selection.
Clothing leaning into brands, where we are underpenetrated, a bigger focus on apparel.
The reduction of New third party brands as well as our own private label.
In the fourth quarter, we saw great vendor diversity with the majority of our top 20 vendors posting gains and driving excitement in their respective categories.
Not only will we excited by the amount of brands that showed improvement, resulting in non Nike com growth of greater than 30%.
We also remain encouraged by the size of the business. We are building with our major partners, which has grown consistently over the years.
The momentum of brands like that he does Puma new balance timberland.
And cracks through 2021 showcase the expanding breadth of our consumers sneaker closet.
Covering athletic outdoor and seasonal.
Also our push into apparel continues to yield strong results with the category growing 30% in the fourth quarter and reaching one $4 billion in annual sales for the first time in the company's history.
And within our control brand strategy following up on our successful menswear launch a blocker in the third quarter in December we launched cozy.
Women's wear private brand, which is off to a great start.
In addition to our own labels, we've continued to develop exclusive partnerships to create energy and connect with new consumers.
We launched all city by just an exclusive lifestyle basketball brand that has inspired by the spirit of community that is immediately resonated with the next generation of street wear enthusiasts.
We continue to have curated drops by melody is certainly a creative director of our womens business, because we expand their offerings and make street, where more accessible to younger female consumers.
Army Channel, we continued to enhance our consumer experience with new features like payment options and launch capabilities.
Outside the U S. We hit significant milestones and transitioning to our new ecommerce platform completing the rollout across foot locker Europe .
We also continue to expand our drop ship program, where we added more vendors during the fourth quarter to expand our assortment and availability online.
Our integrated F. L X reward program continues to build momentum.
In Europe , we continue to roll out the program across the region in Italy, Spain, and Germany in Q4 with five more countries planned for 2022.
Overall on an annual basis, we saw over 50% growth in active members.
The difference between member non member spend has increased year over year.
And the sales capture rate increased from 50% last year to nearly 70% this year.
On the M&A front, we added two tremendous brands and high growth companies Ws estimate most of the foot locker family.
Strategic acquisitions expand our customer base and geographic reach strengthened our store footprint and further diversify our product mix across consumers and price points.
WSI is gives us a strong off mall presence in fast growing markets with a full family offering.
Special connection to the Hispanic community.
While at Louis provides us with a foothold in Japan, and a key launching point into the rest of Asia.
While not yet in the company's overall consolidated per piece, both businesses comped up double digits in the fourth quarter.
Looking ahead, our customer centric framework demands that we need to adapt and move the business to where the customer is headed.
Gen Z in particular craves uniqueness to projector individualisms.
Which we are well equipped to serve with our multi brand model.
While we seek to provide more variety our largest spend there is accelerating its DTC strategy.
Specter concentration to decline meaningfully in the fourth quarter. This year to a level that will continue into 2023.
We continue to have a strong relationship with Nike.
Made an important partner for our business, especially in basketball kids with Sneaker culture, where we have an unrivaled connection with our consumers.
As we remix our business 2022 will reflect an acceleration of preexisting strategies that are well underway that have already been yielding success.
On the product front, we will continue to work to further diversify our merchandise and vendor mix, including new brands in the elevating brands in categories, where we are underpenetrated.
We continue to strengthen our consumer transcept offense to deliver exclusive products storytelling driven by our extensive consumer insights.
These will include big global programs from IV to us and stripe life and a truck oil state of mind.
Exciting storytelling with new balance around a $5 seven for life concept elixir.
An exciting third party partnerships with the likes of Pokemon, and Puma with carrots, and crocs among others.
We will build out of our basketball leadership position with the continuation of our exclusive lamellar ball program with Puma.
New exclusive partnership with Reebok, featuring the iconic iverson in shack franchises.
Nike exclusive basketball concepts and got next legacy and the tunnel work.
We will also be continuing to grow our exclusive control brands to enrich and add dimension to our apparel offering to connect with consumers and add uniqueness to our assortments.
Another area is our shift to bigger box off mall formats, and a rollout of key growth banners, both of which we are accelerating in 2022.
Based on the success of our first 50 global community and power stores, we will be growing these formats to approximately 300 locations over the next three years.
Our community empower stores enhance both our off mall presence as well as our connection with communities by bringing life to a wider and richer more locally relevant product assortment.
These stores help us build authentic relationships with our customer that the hyper local level by incorporating local elements into the physical designs.
Partnering with local businesses and organizations.
Gauging local artists athletes and Influencers.
Product from local designers is given special activation when stores are staffed with local personnel to deepen the ties to the community.
Additionally, Ws sets is now expected to reach $1 billion in sales by 2024 supported by accelerated store openings and strong same store sales growth.
The company also expects to grow at most by approximately 50% to nearly $300 million over the next three years by scaling with existing markets and expanding internationally.
We are excited to soon be opening our first home field store in South Florida.
Our new off mall large format concept store provides a one stop shop across sport lifestyle sport performance in nutrition and wellness.
<unk>, which interactive experiences with energy stations, a focus on wellness dedicated training zones coaching clinics training sessions and more.
We have four pilot stores planned for this year and believe this presents another exciting opportunity to further diversify our consumer base.
Assortments.
We will also be accelerating our omni channel evolution efforts as part of our investment in golf group. The companies are in active discussions to create programs aimed at enhancing the value proposition and consumer experience of both platforms.
<unk>, creating a more intentional connection between the two companies prioritizing loyalty membership benefits.
While details are still coming together, we are incredibly excited to be working with our partners at Google and finding the best ways. The two platforms can create value together.
We will keep you updated on our progress.
Separately the company will be accelerating its rollout of drop ship across vendors banners and regions through 2022, which allows us to add to our assortment and availability effectively creating an endless aisle for the consumer while not increasing our working capital needs.
As part of our efforts to drive productivity another of our key strategic imperatives, we are announcing a new cost savings program.
This new cost savings initiatives is expected to generate savings of approximately $200 million on an annualized basis and is designed to better align the company's cost structure to its needs to remain nimble and able to invest appropriately as the consumer landscape evolves.
Andrew will provide more detail on this program in a moment.
As we look forward beyond 2022, we are confident that the remixing of our business aligns us well with the consumers desire for a variety of both product and experiences.
Our strengths remain our unique affinity with our customers across our portfolio of retail brands and our growing ability for them to engage with us in multiple ways.
Our balance sheet remains strong and we have made tremendous progress in reducing our mall exposure as we shift stores off mall, which Andrew will detail in a moment.
Foot locker is one of the truly iconic retail brands in the industry with a special place in the market as a destination for great selection and product discovery.
We will meet our customers, where they need us and want us to be with the multi brand omnichannel experience that is more relevant than ever as we continue to foster connectivity with the communities that we serve.
Finally, before I turn the call over to Andrew I want to extend a heartfelt thanks to our entire team who did a great job throughout the quarter and a record year.
Their commitment with great effort made our tremendous results possible.
I'd also like to welcome Rob Higginbotham to foot locker as our new Vice President of Investor Relations Rob.
Rob joined US last month looks forward to getting to know all of them.
We thank Jim Lance for leading our IR effort over the past several years and Jim remains an integral part of our finance team.
Let me now pass the call over to Andrew.
Thank you <expletive> and good morning, everyone.
Our fourth quarter results demonstrate our progress in rebalancing, our business across brands and categories as well as investing in new banners and formats and increase our reach in connection with our customers.
Our fourth quarter comparable sales across channels grew 0.8% with total sales up six 9% and up eight 2%, excluding the impact of foreign currency.
As a reminder, our recently completed fourth quarter was the first full quarter for both WSI, and Atmos, which contributed $139 million and $49 million, respectively to sales in the quarter.
After starting the quarter strong with November comps.
High teens December slowed significantly with comps down high single digits.
In addition to consumers shopping earlier and pulling some December activity into November Rd.
December receipts slowed as a result of supply chain disruptions.
And certain launches were shifted out of December into the spring.
December shopping patterns, where further complicated with the ramp up of the omicron Varian.
January comps improved to essentially flat as receipts remained a drag but picked up through the month, resulting in inventories ending the quarter in a strong position up 37% over last year.
Okay.
For the quarter, our global fleet was opened 97% of available days versus 87% last year.
Comparable sales in our stores grew eight 8% with store traffic up approximately 25% while conversion was down high teens.
Digital penetration was 21, 6% compared to 27, 4% in 2020 and 18, 7% in 2019.
Units increased high single digits, while average selling prices fell by high single digits as.
As ongoing improvements in full price selling was offset by a higher mix of apparel in 2021.
Turning to our results by geography and banner.
North American comps overall were down four 5% with an accelerated drag from the wind down of foot action.
Foot locker, Canada led the way up low double digits with foot locker U S up low single digits.
Kids foot locker and Champs were down low single digits.
In EMEA.
Overall comps grew high teens as operating days improved to 93% versus 63% last year.
And then APAC comps were up over 20% with strong performance in both Pacific and Asia regions, while doors were mostly reopened during the quarter travel restrictions in Asia continued to impact the recovery in this region.
Moving down the income statement.
Gross margin declined 10 basis points.
Occupancy Deleveraged 110 basis points as a result of lapping elevated rent abatements and the prior year.
This deleverage was offset by 100 basis points improvements in merchandise margin driven by the still favorable promotional backdrop.
Excluding rent abatements occupancy was relatively flat and our gross margins were up year over year and versus 2019.
For the fourth quarter.
Our SG&A rate came in at 22, 4%, representing deleverage of approximately 140 basis points.
The deleverage was driven by higher labor costs marketing and technology spend.
Depreciation expense was $55 million versus $44 million last year.
Driven mainly by the inclusion of WSI and Atmos.
Interest expense increased to $6 million from $2 million in the prior year due to the incremental expense from the company's new bond issuance.
Within other income we recorded a benefit related to the mark to market of our investment in retail with limited our partner in the joint venture that manages our foot locker stores and select eastern and central European markets as well as our franchise partner in Israel.
Moving to our tax rate.
Our non-GAAP tax rate came in at 24, 2% compared to last year's rate of 25, 4%.
Now.
Turning to our balance sheet, we ended the quarter with $804 million of cash with receipts picking up through the quarter. We ended the year with inventory up.
37% versus 2020 and up approximately 5% versus 2019.
That is in a strong position to meet.
Demand heading into 2022.
During the quarter, we repurchased 4 million sphere of our common stock for $178 million and paid $29 million in dividends.
Okay.
Turning to our 2022 financial outlook, which we laid out in our press release earlier this morning.
Our guidance includes a meaningful vendor mix shift bigger.
Beginning in the fourth quarter of 2022 and going forward, we do not expect any one vendor to comprise more than 55% of our product spend.
By comparison this is down from approximately 65% in the fourth quarter of 2021 .
This change reflects nike's accelerated strategic shift to DTC and foot lockers ongoing brand and category diversification efforts.
For the full year of 2022, this would equate to approximately 60% Nike concentration down from 70% for 2021 and 75% for 2020.
So we typically don't provide vendor concentration on a quarterly basis, we wanted to give as much transparency as possible to put our 2022 outlook and contacts.
We are also lapping the benefit of stimulus from last year that will put pressure on our results in 2022.
As such we are guiding total sales decline of 4% to 6% with comparable sales down 8% to 10%.
We plan to open approximately 100, new stores in 2022, including 40 community and power stores.
27, <unk> stores and nine Atmos stores, while closing a total of 190 stores.
Our store count will be down approximately 3% in 2022 with square footage down less than 2%.
Taking a look at gross margin, we do not expect a favorable promotional environment and historically low markdowns that persisted in 2021 to continue into 2022.
Combined with occupancy deleverage and higher supply chain costs, we expect 2022 gross margins to decline by 410 to 430 basis points.
When compared to a more normalized 2019, we expect gross margins to decline 150 to 170 basis points as increased supply chain costs more than offset improvements in product costs.
SG&A for the full year is expected to leverage 30 to 50 basis points, which includes a partial year benefit from the company's cost optimization plan, which we announced in our press release.
With input from our outside partners. This program is expected to reduce overall cost and enable the company to move with more agility and the execution of our strategic imperatives.
We are in the early phase of the plan and we will provide more details on our first quarter earnings call.
We expect our non-GAAP EPS range for 2020 to be $4 25.
Two $4 60, which is comparable to our 2019 earnings per share of $4 93.
As we enter 2022, our balance sheet remains a strategic asset for our business open.
Opening the year with over $800 million in cash.
600 million Undrawn on our credit line and strong coverage and leverage metrics.
Looking forward, our cash flow remains robust and our capital allocation priorities remain the same.
First in the growth of our business and return cash to our shareholders through our periodic dividend payments and opportunistic share repurchase program.
Yesterday, our board approved a 40 cents per share quarterly dividend and a new share repurchase authorization of $1 $2 billion.
Our Capex plan for 2022 is $275 million, which includes our new store openings, our ongoing technology and omnichannel investments as well as a new distribution center in Reno, Nevada, and a new W. S. S facility in Houston.
Texas to support growth in that banner.
In addition, our real estate portfolio provides us with a tremendous amount of flexibility as we move forward.
Over the past several years, we have increased our off mall mix in North America to 21% up from 14% in 2018, and we expect that that mix will continue to move up as we open up power and community stores as well as the potential ramp of Homefield stores.
At the same time, we have reduced our overall lease life in North America to approximately three years down from four years in 2018.
These relatively short term leases have allowed us and will continue to allow us flexibility to optimize our real estate decisions in a cost effective manner.
In closing, we are continuing our journey and diversifying our business with our fourth quarter and full year 2021 results as proof points of our progress.
We are confident that our customers and product diversification efforts will continue to drive differentiation and connection with our customers and scale with our vendors.
Our team is focused and we look forward to sharing our progress throughout this year with that operator, please open 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.
If your question has been answered.
To remove yourself from the queue. Please press Star then two.
If you're using a speaker phone please lift your handset to allow optimal sound quality.
Also we do ask that you limit yourself to one question with one follow up.
Well now take a moment to some of our roster.
Our first question comes from Jonathan Komp with Robert W. Baird You May now go ahead.
Yeah, Hi, Thank you good morning, I, just wanted to understand a little bit better.
Changes to the vendor mix that you highlighted and maybe just thinking through the major changes you've seen in that relationship if any specifically with Nike and the significance of the fourth quarter of 'twenty, two why you're calling that out.
Sort of a shift in mix that you expect.
And then going forward when you think about that could you disclose the total penetration for your top five.
How should we think about the next <unk>.
Vendors within the top five that arent Nike, how you extract out the mix of those vendors to change. Thank you.
Sure. Thanks for the question Jonathan.
And as we reflect back on 2021, there was an awful lot of focus with us and our vendor partners around inventory management prioritization of key products and the other thing of SKU lines. You know as we continue to battle through the pandemic you know there was a heavy heavy concentration.
And a very few skus and that clearly allowed us to be successful in 2020 . One as we went through our normal planning process with all of our vendors, which will do in November December January as we as we set up the next fiscal year for us It became clear that allocations as we got to the <unk>.
Back half of the year, we're changing and again as we've talked about in our prepared remarks. Some of that is the Nike move to DTC that they've talked about and again I believe has been able to accelerate during COVID-19 , but some of it is truly are.
Part of our ongoing journey to create a true house of brands that we are we've got very high and our concentration in and many of you have called it out and as we shifted a bit and I think the Q3 and Q4 were great proof points for us that we saw great growth outside of the Nike and Jordan business. The next group of <unk>.
Vendors most of our top 20 vendors all had strong double digit growth and we were able to drive the business. So again as we look forward to.
Q4 is really in the planning process, where we saw the first.
Impact that we mentioned it.
Wanted to be as transparent as we can with you all so again, but this is certainly part of accelerating our product assortment and vendor assortment changes that I believe Q4 was a great proof point and how successful we've been so far.
And if I could just follow up to that the comps guidance for the year of down 8% to 10% could you maybe disaggregate how much of that outlook reflects expectations.
Our expectation is that the you know that the private label initiatives and the other brands wont make up for the lost Nike product and how much of it is sort of a general assumptions, you're making for the environment and cycling stimulus and everything else that's not related to the vendor change. Thank you. Thank you.
It's a combination Jonathan and we haven't parsed it out.
For public consumption, but it is a piece of all of those we've got the the certainly the inflation that we're all seeing we've got you know the stimulus that won't be repeated in 'twenty two.
Still a fair amount of supply chain disruption when you think about between 60 and 70 vessels still anchored off long beach in.
La trying to get in so again, it's a combination of all of those things that you called out, but we have a high degree of confidence that our private brands are shipped to apparel or are bigger pivot off mall again, one of the reasons that we've pivoted off mall is so that we can truly create more space for these great stories that are.
Our teams tell and you'll ultimately those bigger spaces connected with our Omnichannel and digital efforts.
Create a stronger demand creation opportunity for us, which again I think the.
Pumps is reflected.
<unk> all of those elements that you called out Jonathan.
Okay understood and best of luck. Thank you.
Our next.
Comes from Paul Kearney with Barclays. You May now go ahead.
Alright, thanks for taking the question.
Just a quick one.
Is embedded in the sales and EPS contribution from Ws us in Atmos to your FY 'twenty two guard.
Yeah, if you recall.
When we initially had forecasted approximately 40 to 48 since contribution from those.
That is scaled up and that that number that's embedded in there is approximately 60 to 65% to 75%.
Okay great.
Just a quick quick follow up can you just.
Some commentary on what Youre seeing on the consumer we see weakening demands.
Cost inflation kind of rolls through in price increases that youre seeing just just throughout your merchandise what do you kind of expect the consumer reaction will be and what has it been historically thanks.
Well, our consumer has been very.
<unk> has been able to spend.
Fend off some of these inflationary trends it seems like and again is as the marketplace opens more and they get more active.
We'll see what happens, but clearly traffic was up significantly in the fourth quarter. The consumer has shown a tremendous amount of resiliency.
We all are as it relates to our specific category. We all wait for the tax return money to start flowing in Q1. So again I think that there is a lot of upside with our consumer they have not been hesitant to to.
<unk> the stores and shop, our digital site. So it depends on how long and how ramp of the inflation gifts again, clearly with some of the geopolitical things going on there is a wait and see as what the impact to that that will be to the broader global market, but again, the consumer has been very resilient.
Thank you best of luck.
Thanks, Paul.
Our next question comes from Tom <unk> with Wedbush Securities.
Go ahead.
Hey, good morning, guys. Thanks for taking my question from.
From a modeling perspective, when we think about.
This year.
Should we assume that the worst quarters from a comp perspective should be Q2, when you're lapping stimulus in Q4, when the vendor change really happens and should we assume that comps are negative in all four quarters of the year.
Well I think your assumption around Q2, and Q4 is correct Tom.
Again, I think stimulus is going to.
You know play a little havoc with everybody in the marketplace, but certainly we expect some pressure there and then obviously the pressure that we talked about with the.
The allocation changes in Q4 will play into that.
Q1, and Q3 you know.
Flattish to down slightly I think is the way that our model is built in.
A lot of its dependent on the flow of tax return money a lot of its dependent on the resiliency that I just talked about and the customer that stayed strong so far.
Let's go ahead, Andrew no I agree flattish in Q1 to Q3 pressure from stimulus and the allocation shift in Q2 and Q4.
Yes.
Understood and as we look out to FY 'twenty three I mean, I know, we're a long way from there but if.
If the vendor mix change is happening or if it's really happening to it to a great extent in Q4.
I would suggest that would also be some some wrap around into into 2023 as well.
Am I thinking about that correctly.
Yeah, as we said in our prepared remarks, we see the levels in Q4 wrapping around and again that's.
With one specific vendor, but we also expect that the growth that we've seen from our other initiatives around our other brand partners, our private label brands, our drive into apparel and this off mall pivot into some bigger.
Store base will be some of the offset there.
Understood. Thanks, guys and best of luck navigating these are tricky time, so take care. Thanks.
Our next question comes from Jay sole with UBS you May now go ahead.
Great. Thank you so much I just wanted to ask about just some of the vendor changing that's happening.
Could you elaborate a little bit on what type of products are going to be on different allocation really specifically apparel versus footwear.
Maybe just to start with that one thank you.
Yeah as I talked about during 'twenty, one and 'twenty two Jay there was a concentration into some very specific styles.
The heap from certain styles that Nike.
Certainly drives through their DTC, and that's where the allocation pressure will be we still have access to all of those products will just see different quantities flowing our way and part of the effort that we've had ongoing with Nike is to diversify our mix with them as well because we got very concentrated in those silhouettes.
Again part of it was you know the.
The thought of in 2020, the thought of survival and you're having to focus on inventory management. The prioritization of those key products and they said that it allowed us to be very successful in 2020 , one, but as we got further into 'twenty. One it became very clear that we needed to diversify.
Our offering for our consumers and that coincides with.
Nike is the DTC growth. So again, it's a it really is.
Jay you you've been around the business long enough you know the key styles and more of the heat comes in again, we will still have access we will just see fewer units and those skus, but we will in fact continue to diversify our business with Nike and we'll continue to grow our other brand partners Hey, Jay.
I can't over emphasize as much unless just with <expletive> pointed out is as we move through the pandemic.
You saw elevated access and some of those styles, especially as it relates to early part of 2021 and so.
Getting back down to a more sustainable mix of product even in a spouse is what a lot of this shift looks at but there was elevated access.
During the pandemic as of 2020 in 2021.
Got it maybe just to follow up on that I mean could you mentioned the word sustainable I mean can you put in context this change versus last year.
The foot action stores closing or.
Percentage of what actions towards closing like is this sort of now like just.
One change where now you are at a sustainable level going forward or do you feel like maybe there should be some more tweaks and adjustments to the allocation going forward.
Yeah.
Separate those things Jay quite honestly right I mean, we looked at our marketplace with foot action Champs and foot locker and part of what had happened during the.
Pandemic is that we had gotten even closer together with those three banners. So our decision to close foot action was really driven by.
Not having enough separation will not seeing that we could create enough separation with those three adult male banners fast enough.
So given some of the flexibility that we had with leases and Andrew called out you know that we continue to lever down the length of our ineffective leases, we chose to close foot action and now we've got two really strong banners. When you think about the foot locker three strong banners in North America at kids foot locker foot long.
<unk> and Champs in East Bay, and we will continue to utilize our our allocations of the geographic level to assort appropriately and grow our other brands as relevance and again Champs is because you.
Always have a little bit of a broader product assortment, because they've got more space for apparel in the traditional stores and more space for more branded footwear. So again, we feel good about the portfolio and the allocation discussion in the foot action discussion or are really two separate discussions.
Got it okay.
Did you so much.
And Jay just kind of going down to the allocation. When you think about vendor concentration and sustainable business models going forward, we talked about.
Single vendor going forward having.
Having more than 55% penetration and that's kind of the direction that we're modeling our business around as we as we move forward right now.
Okay understood. Thanks again.
Our next question comes from Kimberly Greenberger with Morgan Stanley .
No go ahead.
Great. Thank you so much and good morning, I wanted to ask.
Yes.
Walker still considered a strategic partner.
For Nike or has that.
Has that classification changed over the last.
Year and secondarily could you just talk about the productivity of the new brands that are coming into fill the floor space that.
Nike is leaving behind thanks, so much.
Thanks for the question Kimberly.
Again, we continue to be a strong partner a strategic partner of Nikes and we are working on building complementary strategies to their DTC growth.
They're supportive of us and specifically basketball kids and sneaker culture continues to be elevated so again I feel great about the relationship we have ongoing dialogues with them as we plan our business.
This has been something that's been in process for a while as we've continued to shift our business and focus on the things that we need to do for our company. So again strong strong relationship there.
Well again part of the <unk>.
We'll model that works in our industry as the scarcity model and again, it's one of the things that Nike does the best as they control the flow of these hiseq products into the marketplace, which keeps the demand high so again, they they will certainly benefit their DTC with some of that will continue to benefit from that but our biggest benefit.
It will be broadening our assortment with them and bringing other other brand partners in the.
The the second part of your question Kimberly around the productivity of those second that next tier of vendors.
Product across the board doesn't turn quite as fast as the Nike product.
But that being said, we just had a great lamella ball watch with Puma, we'd bring in high heat collaborations cracks in carrots.
We do those things and drive heat in demand.
With those type of offerings, which are again turn pretty quick so I would say in general a little bit less productive, but you know again one of the hottest brands in our market right. Now certainly continues to be new balance and that's in all of our geographies. So there there's puts and takes as we help brands develop and really.
We gave that demand we see their productivity accelerate.
But there is nothing like a retro Jordan launch that comes in on a Friday and sells on a Saturday.
That's a tough.
The dynamic to overcome but again I think there is enough heat and we do a great job of storytelling and demand creation that we will continue to be productive at our boxes and overwhelmingly channel efforts.
Okay, great. Thank you so much and then just.
Thinking more broadly about the store fleet.
With.
Downsizing of the Nike business does it does it.
Cause you to take out an assessment at the store fleet for potentially additional closures in future years, noting of course that it sounded like youre shrinking square footage by 3% any upcoming year end niche effectively shorten your average lease life.
Shouldn't we take these as signals, perhaps that over time, you plan to continue to downsize the fleet.
Well Kimberly we've been a net door closure for a decade, though right now if you look a decade ago, we had probably 4000 stores or close to 4000 stores and we have continually look for opportunities too.
Get into get the right sized store in the REIT marketplace to serve the consumer and just a slight correction or square footage is going to be down about 2% our door count will be down about 3%.
So, but our team does a great job proactively managing our portfolio and when we see the opportunity to exit a lease early because the stores not as productive as we'd like or we can't afford to put the capital into that specific marketplace.
We've done we've done that.
There's a really good job of that over the years and will continue to do that but I do expect that we will continue to see door count go down square footage stay flat.
Flat to slightly down.
Thank you so much.
Please go ahead.
I was going to say as it relates to the lease life I mean that you should read that as an indication of our as a proxy as part of our omni channel journey.
As digital engagement goes up and as we continue to.
To increase our digital penetration thinking of that full omni circle, we need to consider our physical footprint and given ourselves leveraged in that physical footprint to flex up from flex down and get out of leases in a cost effective manner as <expletive> pointed out has been a journey and it's been an effort that we've been on that.
For a while and that continues to really really help us to make the right real estate decisions and one other thing about the door count as we look at 2022 and beyond will be the growth of the Ws LS storms right. We've made a great acquisition of a fast growing brand very connected to a specific.
Consumer and we will over the next three years of planning to double that door count. So again, we'll expand much slower with atmos, because it's really a digitally led brand with Ws S. There, there's an awful lot of white space as it relates to that consumer and where there would not be the same.
We've gotten we've begun the migration out of southern California, but.
Just.
Stuck our toe in the water in Texas, We've got South, Florida, that's going to open up with WSI. So again, we see tremendous growth opportunities. There. So there's always puts and takes across the portfolio.
Thank you so much that's very helpful.
Our next question comes from Brian Mcnamara with Bahrenburg capital markets. You May now go ahead.
Okay. Thank you for taking the question clearly these are <unk>.
Vendor decisions arent arent made overnight I'm, just curious kind of when did you get the indication or wind at Nike I Wonder did you give nike a indication that.
Things are kind of headed this way as it's been over the last couple of months out of your pocket. As you previously mentioned or has it been kind of over the last couple of years I'm just curious a timeline of the vendor decision. Thanks.
We've continued we started this journey just prior to Covid.
Colin if you go back to our Investor Day in March 19, we started to show some of the vendor changes there, but certainly as it relates to the numbers that we talked about today, our 'twenty two plan and the wrap around into 'twenty three.
These discussions really happened during January late January actually when we were in a regular planning process with the with Nike. So again, it's sort of a acceleration again that I believe is driven by their success with DTC certainly, but I think the Covid has allowed us all to see the.
The consumer is changing consumer behaviors are changing our consumer is clearly, saying that they want choice.
Multi brand destinations matter and when 70 plus percent of your 75% of your purchases are with one vendor it doesn't leave a lot of.
Space in your store for choice. So that's that's part of what we're looking at so really it's an acceleration of conversation that's been going on for a couple of years and it was late January when we.
Worked on the planning for 2022.
And just a quick follow up on the 55% is that a number you expect to continue to drift lower over time, how should we think about that on a kind of a longer term.
Outlook. Thanks.
We don't expect it to go up from there we would expect it to probably drift slightly lower but again that depends on where we take the brand where the.
We've worked with the brand to move forward to meet our customer expectations Javier DTC business progresses et cetera. So you got about 50% to 55%.
If you reflect back to the mid two thousands 2006 10 to 2010, that's about where we were in the mid fourteens to upper Fifty's in.
We will.
A healthier business bye bye.
Spreading.
Our choice for our consumers out to a broader.
Broader vendor base and Brian It's math and it may end, it's obvious but remember that penetration is the penetration of our buy we expect to grow.
Our non Nike brand.
A much faster rate and so therefore that penetration could go down as just as a sheer result of the growth of our other businesses.
Great. Thank you.
Yeah.
Our next question comes from Michael Binetti with Credit Suisse. You May now go ahead.
Guys. Thanks for.
A question here.
I guess, we've gone over the vendor mix quite a bit here, but yes, maybe I'll focus on the model for a minute can you can you help us just reconcile between the comps down eight to 10, what is down one to two more on top of that but revenue is only down four to six I think there's a gap there.
And maybe you can just help us clearly understand the footage down one to one 2% how are the acquisitions that fit into that that number and I would also love a little bit of help understanding the cadence of gross gross margin this year and how much we should expect the gross margin compression to be.
Concentrated around the fourth quarter vendor mix. Thanks.
Yeah, I'll I'll jump on the first part of that question, Michael and then Andrew can can jump in.
Again part of the sales change the comp change in square footage change is being driven by our acquisition of <unk>, that's an apples right. So atmos does.
A bigger percentage of their sales digitally there are double digit.
Comp grower WSI has been a teens grower.
We expect that to continue and to add square footage there. So that that's sort of the relationship we expect.
As we've talked about in the prepared remarks, we expect doors to be down.
About 3% square footage in that 1% to 2% range and productivity because of the broader offering and in our off mall.
Community stores in power stores, we expect you know that that's going to help cover some of the overall sales change as will ws assess as we expand.
As we expand their footprint.
And just to add a little bit on the footprint because we're opening bigger format. So you can be down and closing at.
At a faster rate of stores.
We opened stores in bigger footprints ws's, a bigger footprint the community.
In Homegoods stores are bigger footprint. So that's why the square footage is declining at a slower rate.
Now as it relates to gross margin.
From a margin perspective.
There is.
There is a we called about 400 to 410 bps decline in gross margin and as you think about that about 100 about 130 of that relates to occupancy deleverage.
If you think about the.
The revenue coming down and that's moving out of.
Having that occupancy footprint, so there's going to be some deleverage there.
And then on the merch side, approximately 280 ish on the merch side and of that 280 on the merch side approximately a 100 bps is really driven by increased freight costs.
How would you break down the remainder of that 100 and the other 180 of them.
Yeah.
Yes, there's going to be some some distribution center cost.
And.
The rest of it is really a distribution center costs increased.
Acquisition related costs.
And.
We honest and Mark and Steve Martin <unk>, Martin, Yeah, Youre going to see markdowns, we've run at historical lows during 2021, but we don't expect that the.
Marketplace to get overly promotional but we do expect it to be more promotional than it has been in 2021 right.
Yes.
And just just so I'm crystal clear the footage down one to two is taking the end point from 2021 with Ws Essent Atmos Senate and the endpoint of 2022 that Delta will be down one to two and we had all the components up.
That's correct yes.
Okay. Thank you guys.
Our next question comes from Cristina Fernandez with Telsey you May now go ahead.
Yeah good morning.
I wanted to talk about the the vendor mix changed but think about the apparel versus sort of where competition apparel on my math was about 16% of sales last year as you look.
But as to how the business is changing do you see that being materially higher as we move over the next couple of years.
Yeah, we absolutely do both from a branded perspective in our private and control brands.
One of the benefits of moving.
Off mall into slightly square.
Or square footage doors is that we can do a better job of storytelling for apparel for all the great apparel brands that we work with.
As we brought in our locker product in our cozy product in Q3 and Q4, we saw great acceptance from our consumers.
We've got you know many.
Many brands that we work with to drive apparel as well. So I think the more square footage really allows us to do a better job of storytelling and demand creation around apparel and working with great great collaborators like melody aside he doesn't see those all drive our apparel.
We will continue to leverage that across all of our brands.
And as a follow up.
Can you talk about the power stores that you've opened so far how are they how are they performing relative to the end.
Stores in malls and any details you can see you can share about how that vendor mix isn't those stores can be apparel penetration that would help so think about as you transition to more.
Our small stores, how that how that's kind of helped.
Help the business.
Yeah, we haven't broken down the specifics inside each of those power store boxes, but suffice it to say that we've been very pleased with the results of the first 50. That's why we are accelerating our expansion of those if you think about our really our first 181st Street eight mile Road in Detroit Compton.
Dallas Crenshaw.
Philadelphia in the UK, we've opened up Brixton, we've seen a broader distribution of brands in those stores because we have more square footage, we have seen a higher penetration of women's and kids because we can do a more full family presentation in those stores and we've seen a greater connectivity from our consumer as they come in to that.
Stores spend more time shopping their dwell time is longer etcetera. So again, we've really.
Been on this journey the 191st Street store in the Heights opened up in 2019 2018 2019.
And we've been on this proof of concept, Germany, and you have to test it around the globe you have to test it with a lot of different ways, but the brand expansion the square footage expansion the ability to take care of full family shoppers with full family offerings has really been the strength of the power stores and communities.
And of course, the deep connection with the community.
Bringing in local managers to run big Big boxes. Historically, we would have brought a manager who had experience running that size store. We're now looking for local managers to make sure that they've got that deep connectivity with the community.
Okay.
Our next question. Our last question comes from Robert in trouble with Guggenheim Securities. You May now go ahead.
Hi, good morning.
Quick questions. Good morning, a couple of quick questions I think the first one is when you think about some of the vendor shift the marketing.
Expense requirements I don't know, if it's cooperative marketing or co op dollars et cetera could you just talk about your plan to need to invest in some of these smaller.
I would say use the iconic.
Brands are our players that you're partnering up with and in that relationship and I guess the second question is.
When you look and this is probably for Andrew but when you think about the transition underway in the business. It does sort of strikes me that you know the.
The range.
Of rates that you're forecasting for 'twenty, two is rather tight versus your historical expectations for like a full year. So I'm just wondering if you can just address.
And that visibility the confidence in gross margin 20 basis point range SG&A range, just broadly speaking that would be helpful. Thanks.
Sure well I'll start Bob and then I'll hand over to Andrew for the second part of the question, but clearly we believe that part of our role in the market is to be a demand creation tool right. So we're working with smaller vendors, we're working with.
All of the the <unk>.
Lenders that we have great products from to create better stories.
Create more connectivity.
Part of our marketing.
Great digital marketing and great social connectivity with our consumers. Our followership is significant and we continue to leverage our F. L X program to sneak speak to our best consumers more often.
So we start with exclusive concepts.
That we're creating with all of these vendors, we communicate that digitally and socially and throughout the lax.
And as we get further and further along that F. L X journey, we'll be able to have enough data that we can truly personalize the connectivity with our consumers. So.
I think that we've got.
The right elements in place.
Got you know very willing partners to continue to grow with us. So in the best with US. So I think certainly a bit of a shift you know the truth is that you don't have to spend a lot of a lot of marketing dollars on certain high heat profile silhouettes, we will deploy those marketing dollars to be more effective as we as we work.
Against our consumer preferences, and the exclusivity of the concepts that we're going to bring to bear in the in our stores.
Well, Bob I'll turn it over to Andrew to talk you through some of the ranges of margins sure.
So as you think about our 2022 guidance and some of the information.
Information that we put out with regard to 2022.
Our our confidence in our ability to really look at our market and look at our offerings and look at our product bottoms up perspective, and really get a fairly good perspective on on our topline.
We obviously have a lot of information on our gut when our margins obviously, we're in an MSR MSRP environment and so.
Our ability to really.
Drive margin is.
It it it it has a ceiling and as and it hasnt floor and as you think about.
Our ability to really get close to the pin on that what we've done is we feel comfortable we feel confident in our numbers, but we also have built in lapping stimulus. We've also built in.
What we believe is.
Slower velocity of some of our non Nike accounts, though that some of our Nike product that will now be elevated and we believe that we have.
Really good pulse on that and so this is a this is the information that we put out for 2022 I think it does provide a relatively.
You know.
Range, that's appropriate for our full year guidance I think that.
There are some specific line item that you want to talk about I'm happy to focus on it.
No I mean, I think I think generally.
Especially just I think the margin piece of it the gross margin piece of it.
And it seems narrow with a lot of the change, but I guess the other piece that I would ask Andrew is.
With the share repurchase program the billion two.
Can you just maybe address the thought process at this point in time on.
The share repurchase and I guess, what's in what's in this forecast the financial outlook for 'twenty two that you have in there today. Thanks.
Yeah, So as you know our share repurchase.
Is and always has been an opportunistic share repurchase so.
Yeah, we don't forecast or guide share repurchase, we'll obviously lean into those.
Opportunities to return value to the to the.
Shareholder as the market conditions allow but we have not modeled in a particular share repurchase amount.
In the guidance that we've provided.
Great. Okay. Thank you very much good luck.
Bob.
I would like to turn the call back to Mr. Robert Higginbotham for any closing remarks.
Thank you for joining us today, please join US again for our next earnings call, which we anticipate will take place at nine a M. On Friday may 20th the call will follow the release of our first quarter results earlier that morning, Thank you and goodbye.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
Yeah.