This summary is based on the second quarter fiscal 2006 earnings call conducted by Foot Locker, Inc. (FL: chart) on August 18, 2006.
Key Investors Issues
- Quarterly net income dropped 68% to $14 million from the year ago period.
- Sales were overall flat at $1,303 million versus $1,304 million in the prior year period.
- Fiscal 2006 EPS from continuing operations is forecast in the range of $1.52 to $1.62 before the non-cash charge.
Second Quarter Fiscal 2006 Financial Highlights
Quarterly net income was $14 million compared to $44 million in the year ago period.
Second quarter EPS was 9 cents per share versus 28 cents per share in the prior year period. Second quarter results included a non-cash impairment charge of 8 cents a share, or $12 million after-tax, to write-down store long-lived assets at the company’s European operation. The company’s second quarter income before this non-cash charge was 17 cents per share, or $26 million.
Second quarter sales were $1,303 million compared with sales of $1,304 million in the corresponding prior year period.
Second quarter comparable same store sales decreased 1.3%. Sales were lower than expected in both domestic and international operations. Foot Locker had weak sales in Europe, where apparel and shoe retailers struggled due to high unemployment and macroeconomic concerns. A later start to the back-to-school selling season also dampened sales in the United States.
- Merchandise inventory at the end the second quarter was 7% higher as against the year ago period, primarily due to sales falling short of expectations.
- Quarterly cost of sales was $942 million versus $927 million in the year ago period.
Gross margin declined from last year by 120 basis points.
- Half of this decline reflected a decline in the merchandise margin rate and the other half related to a higher occupancy expense rate.
- The reduction in merchandise margin rate reflected an increase in markdown activity at U.S. stores, directed towards selling older inventory as the company continues to focus on maintaining internal aging standards. Total markdowns at international stores were lower than that of the second quarter of last year, although the rate was slightly higher.
- Tenancy rate increased by 60 basis points with a 30 basis point increase in the U.S. and a 140 basis point increase in international stores.
- Mid to high single digit increases in utility costs has also negatively impacted the gross margin rate.
Second quarter selling, general and administrative expenses (SG&A) were $273 million as against $265 million in the prior year period.
Second quarter SG&A expenses increased $8 million or about 2.5% versus last year. As a percentage of sales, SG&A expenses rose by 60 basis points. The increase in SG&A expenses includes $2 million due to the adoption of a new accounting standard, FAS 123(R), related to stock compensation expense; $3 million of incremental store wages and other expenses; and $3 million related to foreign exchange.
Other income for the quarter declined by $4 million.
Other income includes $1 million of expense this year versus $3 million of income last year. This year and last year''s amounts reflect mark-to-market valuations of foreign exchange option contracts, executed to offset the translation of foreign denominated earnings.
Quarterly interest expense declined by $2 million.
Lower debt levels and a higher average interest rate on invested cash contributed to the $2 million decline in interest expense.
- Depreciation and amortization for the quarter was $44 million versus $41 million in the year ago quarter.
- Quarterly income tax expense was $11 million compared with $27 million in the year ago period.
- At the end of the second quarter, cash and short-term investments totaled $318 million. Cash position, net of debt, improved by $34 million from the same time last year.
- After the close of the second quarter, the company repurchased $22 million of its 8.5% bonds, due in 2022, at a discount to face value, with the objective to redeploy its cash flow to enhance shareholder value while maintaining a strong financial position.
Store Base Update 
