OUR RUNNING AND APPAREL BUSINESSES
ENHANCE CONNECTIVITY BETWEEN
OUR STORE BANNERS AND E-COMMERCE SITES
This report contains forward-looking statements within the meaning of the federal securities laws. Other than statements of historical facts, all statements which address activities, events, or developments that the Company anticipates will or may occur in the future, including, but not limited to, such things as future capital expenditures, expansion, strategic plans, financial objectives, dividend payments, stock repurchases, growth of the Company’s business and operations, including future cash flows, revenues, and earnings, and other such matters, are forward-looking statements. These forward-looking statements are based on many assumptions and factors which are detailed in the Company’s filings with the Securities and Exchange Commission, including the effects of currency fluctuations, customer demand, fashion trends, competitive market forces, uncertainties related to the effect of competitive products and pricing, customer acceptance of the Company’s merchandise mix and retail locations, the Company’s reliance on a few key vendors for a majority of its merchandise purchases (including a significant portion from one key vendor), pandemics and similar major health concerns, unseasonable weather, deterioration of global financial markets, economic conditions worldwide, deterioration of business and economic conditions, any changes in business, political and economic conditions due to the threat of future terrorist activities in the United States or in other parts of the world and related U.S. military action overseas, the ability of the Company to execute its business and strategic plans effectively with regard to each of its business units, and risks associated with global product sourcing, including political instability, changes in import regulations, and disruptions to transportation services and distribution. For additional discussion on risks and uncertainties that may affect forward-looking statements, see “Risk Factors” disclosed in the 2013 Annual Report on Form 10-K. Any changes in such assumptions or factors could produce significantly different results. The Company undertakes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise.
act honestly, ethically and honorably
respect, inspire, develop and empower
strive to be the best in everything we do
satisfy our customers every time
collaborate, trust, support, commit
be a student of the business to initiate and foster new ideas
embrace diversity, act responsibly for our customers, associates, investors and communities
• create a clear customer focus to drive performance in our core athletic banners
• make our stores and internet sites more exciting, relevant places to shop and buy
• deliver exceptional growth in high-potential business segments
• aggressively pursue brand expansion opportunities
• increase the productivity of all our assets
• build on our industry leading retail team
BE A TOP QUARTILE PERFORMER
Sales per Gross Square Foot
Earnings Before Interest and Taxes
7% of all our assets
• build on our industry leading retail team
2013 Financial Highlights
Before I discuss our ongoing strengths, however, I will first touch on the major highlights of Foot Locker, Inc.’s financial performance in 2013. The Company earned net income of $424 million in 2013, an increase of 11 percent over last year’s record-setting performance. Earnings per share increased 15 percent, from $2.47 to $2.84, reflecting both the improved net income and the investment we have made in reducing our outstanding share count by repurchasing our stock.
Comparable store sales increased 4.2 percent in 2013, while total sales increased 6.3 percent to $6.5 billion. The difference in growth between comparable store sales and total sales was due primarily to our acquisition this past summer of Runners Point Group, an exciting addition to our business which I will discuss in more depth later.
In a challenging retail environment notable in 2013 for its promotional intensity, we were able to maintain our gross margin rate at its record high of 32.8 percent of sales, while effectively managing expenses to produce an improvement in our selling, general, and administrative expense rate to our best-ever 20.5 percent of sales.
Our earnings before interest and taxes (EBIT) improved to 10.6 percent of sales, up half a percent from last year and also a record performance for our Company.
Our business generated a significant amount of cash in 2013, which not only enabled us to remain strong financially, it also enabled us to:
• invest more than $200 million of capital into our business. These investments include store remodels to make our real estate more exciting places to shop and buy; additional tools and training to help our associates serve our customers even better; systems and processes to make our people, space, and inventory more productive; and enhancements to our digital sites and customer engagement.
• acquire Runners Point Group, a profitable, multi-banner, multi-channel, athletic retailer in Germany. We are integrating this business under the Foot Locker Europe umbrella, and it gives us a tremendous opportunity to carefully segment the customer base in Germany --- as we have done in the United States with Foot Locker, and Champs Sports, Footaction, and Eastbay --- as well as explore opportunities to thoughtfully expand our newly-acquired banners, Runners Point and Sidestep, outside Germany alongside our existing Foot Locker business.
• pay a meaningful dividend, which we have increased steadily over several years and which now, after our 10 percent dividend rate increase announcement in February, stands at a strong quarterly rate of 22 cents per share. That dividend, along with the $229 million we spent in 2013 investing in our own shares, demonstrates a firm commitment to return meaningful amounts of cash to you, while still investing in significant growth opportunities for our business and maintaining a sound financial structure.
Our financial performance has not only improved to new heights in recent years, it has also become more consistent. Much of this consistency stems from the various aspects of diversity that we have achieved in our business by executing our strategies. Let me provide you with some examples. First, we have not only a strong men’s business, we also have a very robust children’s business whose potential we are working hard to maximize, and a very large women’s business which we are focused on bringing up to the productivity level of the rest of the business.
Second, we not only developed a strong basketball business, but our running business, our casual offerings, and our apparel assortments are also much stronger compared to a few years ago, and give us a better merchandise balance than before.
Third, we have clearly differentiated our banners, letting each of them focus on a particular customer set. We have banners, such as Foot Locker, Eastbay, Runners Point, and SIX:02, that concentrate on high-performance footwear and apparel; we have banners, such as Footaction, Sidestep, and CCS, that offer a much more lifestyle product assortment unique to each banner. Our banner with our largest stores, Champs Sports, is able to effectively serve customers across a broad athletic spectrum, while concentrating on the kid who knows game, who lives and breathes sports. Among the many benefits of this differentiation is our ability to create truly great marketing campaigns that draw customers to our unique store banners and digital sites.
Fourth, we are no longer just a U.S.-focused company with a modest international presence. We are now a large global company. We operate more than 1,000 stores in 22 countries outside the United States, as well as various local country websites, and we are approaching $2 billion in international sales. We also have another 73 stores in 9 countries operated by our franchise partners. Clearly, people around the world enjoy wearing the premium sneakers and athletic apparel that we sell.
Finally, we are not just a bricks and mortar business. We now have a strong, fast-growing collection of digital sites, both in the United States and abroad. Our biggest digital business, Eastbay, is the premier destination for the elite high school or club athlete, and our store banner e-commerce sites, such as footlocker.com, continue to increase sales at a rapid pace, an impressive 40 percent rate in 2013. Our overall digital business has now grown to 11 percent of our total sales.
The set of strengths I described above lead directly to an exciting number of significant opportunities for us to pursue over the next several years. In the relatively near term, which I define as this year and into next, we have several initiatives already paying dividends upon which to build. These include, first, our children’s business, the success of which can be seen not just in our Kids Foot Locker business, where sales increased at a mid-teen pace in 2013, but in the growth of our children’s business across all of our banners, channels, and geographies. We are doing a much better job buying and displaying kids’ merchandise, and our vendor partners have also improved their product offerings.
Second, I am very enthusiastic about the potential for accelerated growth in Europe. As I mentioned, last year we bought Runners Point Group, a profitable chain of almost 200 stores with two primary banners, Runners Point and Sidestep. The Group is based in Germany, the strongest economy in Europe and which is now our largest market outside of the United States. In the near term, we will focus on customer segmentation inside Germany, and we have had good initial success repositioning these banners to address a broader customer base. Meanwhile, the Foot Locker banner continues to have the opportunity to grow in existing European markets where we believe we are underpenetrated, such as France, Poland, Scandinavia, and Turkey.
Third, we have more progress to make in improving our running and apparel businesses. Both of these categories are strong, although growth slowed in 2013. The new running product in the market from our major vendor partners is very exciting, and we continue to build our expertise in the category and train our associates to help customers choose the right product for their particular style of running, training, or walking. On the apparel front, we continue to improve our ability to read and influence trends, and ensure the assortments from both our vendors and our own brands provide great complements to the footwear in each of our banners.
Fourth, we will continue to expand the number and variety of specialized presentations we have in our stores in partnership with our vendors. With Nike, these shop-in-shops include House of Hoops, Yardline, Fly Zone, and Jordan 23 shops. With adidas, we have the adiCollective and Originals shops, and we also have the Puma Performance Labs. We will use these concepts and look for other new ideas that will enhance our customer experience and make our stores special places to shop and buy.
Finally, we believe we can continue to enhance the connectivity between our store banners and our banner e-commerce sites. We continue to invest in making our sites more engaging and entertaining, as well as more shopper-friendly. The result has been an unparalleled cohesion between what the customer experiences in our store and on that banner’s web and mobile sites. In fact, these experiences are happening simultaneously more and more often, as our customers seem to live online all the time, including when they are in our stores.
We also are investing in technologies that enable us to make our inventory, wherever it is in our system, virtually accessible to our customers however they come to us. Features such as “buy online, ship from store” and “order in store, ship to home,” improve both customer satisfaction and the productivity of our inventory. We are also using technology to train our associates more effectively and give them tools to serve our customers even better.
Over the longer term, we have perhaps our biggest single opportunity: the women’s business. As I described in last year’s report, we launched a new banner, SIX:02, to address the footwear and apparel needs of athletically active women in their 20s and 30s. We are pleased with the results so far, although as of this writing we are still in test mode with seven stores in four states. We continue to make adjustments to enhance these stores and their potential. Between the promising SIX:02 banner and the merchandise assortment changes we are making to our Lady Foot Locker stores, we believe that over time we can create a large, profitable women’s business.
We also see a significant long-term opportunity to build an even more impactful omni-channel business that will combine the virtual and physical stores.
As you can see, we have a lot of opportunities to pursue, and while not all of them will develop exactly the way we envision, the breadth of promising growth and profit opportunities described in this letter present a very exciting future for Foot Locker, Inc. for some time to come. Moreover, our team has shown a great ability to develop and shape new ideas into significant business opportunities
The success of our Company in 2013, and the success we will strive to achieve this year and beyond, depends upon the continued outstanding work of our associates worldwide. I want to extend to each of them my strongest appreciation and thanks for what they accomplished last year, and for the momentum we have built. I also want to thank our outstanding Board of Directors, which has guided us so well in our efforts to achieve the record results I am privileged to be delivering to you in this report. I would also like to welcome to our Board Steven Oakland, who brings a wealth of experience in marketing and brand-building to enhance the leadership of our Company.
As we celebrate the 40th anniversary of the Foot Locker banner in 2014, our Company has grown to $6.5 billion in sales and more than $6 billion in market capitalization, with more than 3,500 stores in 30 countries. Our core values are the foundation of our success, upon which we have built a strong company culture rooted in sports, focused on service to our customers, and providing long-term opportunities for our associates.
Finally, I want to thank you, our shareholders. I have enjoyed my interaction with many of you over the past year as we continue to build on the strengths that the careful execution of our strategies has produced. I look forward to continuing our dialogue, and I know that you join me in having confidence that the combination of our core values, our team, and our strategies will enable Foot Locker to achieve our vision of being the leading global retailer of athletically inspired shoes and apparel.
Foot Locker, Inc. has achieved remarkable consistency in its performance over the last few years. 2013 marked the third consecutive year of record sales and profits, and the fourth consecutive year in which the Company achieved a double-digit percentage earnings per share increase. The Company has also had success driving consistent comparable sales gains across different seasons and retail environments --- for four years running. With so many elements of diversity across its business, the Company has the ability to offset temporary transition in one part of its operations --- such as currently with our women’s business --- with strong performance in other parts of the business to deliver solid overall financial results.
OUR RUNNING AND APPAREL BUSINESSES
ENHANCE CONNECTIVITY BETWEEN
OUR STORE BANNERS AND E-COMMERCE SITES
Some of the initiatives we have been working on are providing a benefit already, but the real financial impact will be realized over a longer time period of two to three years. Examples include:
With these strengths upon which to build, and our large number of opportunities spread over the planning horizon, we believe the future looks bright for Foot Locker, Inc.
The success we have achieved in the last few years is due almost entirely to our industry leading retail team.
In 2013, we developed a global strategy designed to strengthen our team even further. We are focused on attracting, developing, and retaining the best people within the retail industry, as well as on rolling out robust new technologies to improve our store hiring and scheduling processes. We are proud to have an organization that continues to be in the top 10 percent of companies globally in terms of the overall level of employee engagement and effectiveness of leadership.
The strength of our team starts, of course, with the thousands of associates in our stores who do such an excellent job engaging with and servicing our customers. But they get tremendous help from everyone on the team, from our Executive Committee that sets the tone and the strategy, to the buyers who pick the best product, to the merchandisers who make sure it gets sent to the right store in the right quantity and size at the right time, to the website engineers who ensure great digital content and functionality, to the marketing teams who help create the energy around the product, to the warehouse associates who make sure it is shipped efficiently ---- every one of them provides the teamwork necessary to produce the streak of record financial results we continued in 2013.
A key value at Foot Locker, Inc. is the responsibility to support the communities in which we live and work. The Company created the Foot Locker Foundation, Inc. in 2001 to channel its support for those in need. Now, more than a dozen years later, the Company has developed significant partnerships, programs, and initiatives to promote the key causes that connect so closely with our customers, associates, suppliers, and shareholders
Our mission is to promote a better world for today’s youth through educational initiatives and programs that encourage health and well-being through physical activity.
In 2011, the Foundation launched The Foot Locker Scholar Athletes Program, which reflects our Company’s core values and embraces our deep commitment to education and excellence. The Foot Locker Scholar Athletes program awards $20,000 college scholarships to 20 exceptional students a year (totaling $400,000) who demonstrate academic excellence and exemplify strong leadership skills both in sports and within their communities.
In addition, we are proud of our long-standing partnership with the United Negro College Fund and the scholarship program we have created through our annual “On Our Feet” fundraising event. Over the years, the program has raised millions of dollars in support of higher education, resulting in more than 700 scholarships awarded to extraordinary students nationwide. The “On Our Feet” event will continue to benefit the Company’s educational initiatives as well as other programs supported by the Foundation to help young people.
We also contribute financial support and, often just as important, volunteer time and non-financial resources to other premier charitable organizations, including the American Cancer Society, Fred Jordan Missions, and the Two Ten Footwear Foundation. We remain committed to encouraging our customers to be more active and live healthy lifestyles through partnerships to support facilities such as the Joe Brown Park in New Orleans, as well as events such as the Foot Locker Cross Country Championships, which underscores our deep and rich sports heritage.
It is not just the Company that is generous providing resources to worthy initiatives; many of our associates are also recognized in their communities for the countless volunteer hours and financial commitments they make to the causes that inspire them the most deeply.