It was a busy day Monday for Foot Locker (FL) CEO Mary Dillon. Not only did her company report Q4 2022 results, but it also laid out its Lace Up long-term strategy for growth at its annual Investor Day in New York.
“We are entering 2023 with a focus on resetting the business – simplifying our operations and investing in our core banners and capabilities to position the Company for growth in 2024 and beyond,” Dillon stated in the company’s March 20 press release.
As part of this plan, the company will close 400 stores by 2026, including 200 in Class C and D malls and 200 underperforming stores in Class A and B. In addition, Dillon wants to move the retailer from 1,300 malls down to 880, with A and B malls accounting for 72% of its locations, up from 65% today.
It will probably close if you know someone who works at a Class C or Class D Foot Locker location. The company is getting all C/D store lease terms down to 1.5 years or less.
Dillon is cutting 30% of its mall footprint. The writing is on the wall: Only the best mall locations will stay open beyond 2026.
It’s addition by subtraction. Will the plan work?
Dillon’s Reversing Field
Mary Dillon successfully ran Ulta Beauty (ULTA) from July 2013 through June 2, 2021. In the nearly eight years in the top job, she grew the store footprint from 550 in 2021 to 1,290 at the time of her departure.
So, in her last job, she more than doubled the store count; in her new job, she’s looking to cut the mall locations by 30%. What gives? Does Dillon believe the mall is dead?
As Dillon stated, the company is taking the next 12 months to simplify its business. Part of the process is eliminating certain banners.
“Simply stated, we had too much overlap between our banners and some of our smaller banners were adding complexity to our operating model and also diluting our profitability,” Chief Commercial Officer Frank Bracken said on the Q4 2022 conference call. “In North America, we have closed the Lady Foot Locker banner, the Footaction banner, and most recently the Eastbay.com banner.”
As the Lace Up Investor Day presentation points out, the 400 stores represent just 10% of its 2022 sales. But, more importantly, they’re some of the least profitable stores of its 2,700 global locations. So by jettisoning these stores, it’s increasing its margin by 80 basis points.
Addition by subtraction.
Getting Back With Nike
Since Mary Dillon was named Foot Locker CEO in August 2022, FL is up about 10%. That’s a decent performance for a stock down nearly 3% over the past five years. Investors realize that Dillon’s a star hire. But can she deliver a second significant success after Ulta?
She’s not afraid to do what’s necessary to get the ship righted, practically begging Nike (NKE) to return to the table and renew its partnership. In Holiday 2023, Nike’s product will be front and center as the partnership focuses on basketball culture and the kid's business.
If it’s successful, you can be sure Nike will be back for more. Nike went direct, in part, to gain better engagement with their end-user customer. Still, if Foot Locker can accomplish the same thing, it would be foolish for the House that Knight Built to pass on the opportunity to leverage sales in the wholesale category. Every dollar counts.
Not only is it revitalizing its Nike partnership, but it’s adding a more significant assortment of sneakers to be the #1 destination for sneaker fanatics. That’s especially true for its Kids Foot Locker banner, which it plans to grow to $1 billion in annual revenue by 2026.
So, while closing a bunch of underperforming stores, it will ramp up its Kids Foot Locker, WSS, and House of Play store footprints in the next four years on its way to $9.5 billion in annual sales.
Having Nike on your side will help.
Will Dillon Be Successful?
I don’t have a crystal ball. But I know that Foot Locker had become stagnant and boring, which is probably another reason Nike backed off the relationship.
Interestingly, one of the things Dillon learned while CEO of Ulta was that the omnichannel customer spends more than those that only shop online or in the store. The beauty retailer’s omnichannel push blew the roof off revenue growth.
Foot Locker’s Lace Up presentation points out that its omnichannel customers spend 3x more than its online-only or in-store-only customers. Given only 7% of Foot Locker’s customers are omnichannel spenders, compared to 18% for a multi-branded peer, the opportunity to grow this percentage is tremendous.
“We will accelerate our omni offense with key enhancements across the customer journey,” states the presentation. Foot Locker aims to boost its digital penetration from 17% of its customers to 25% by 2026, leading to $2.5 billion in annual online sales.
That’s a move right out of the Mary Dillon playbook.
While there are many moving parts, I wouldn’t bet against her.
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On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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