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FOOT LOCKER REINCARNATES FOOTQUARTERS CONCEPT

By Neil Janowitz

IN FEBRUARY 1995 RETAILER Kinney Shoes, then one of the largest divisions of the Woolworth empire, comprised two segments: athletic, which included the Foot Locker brands; and specialty, including a line of shops called Footquarters.

The Footquarters stores were essentially outlet operations in open-air and value centers, offering overstocked, fashion-oriented shoes at highly discounted prices, according to John Shanley, a senior analyst of athletic gear and footwear at Susquehanna International Group. And though athletic footwear stores thrived in the mid-1990s, becoming ubiquitous in American malls and spreading internationally, the profit margins on the specialty side were too small to allow the company to keep up with the rent. Woolworth reorganized in 1995. In 1998 Woolworth changed its name to Venator and shut down the Footquarters operations. (The company would change its name again in 2001 to Foot Locker, Inc.) Not long after Woolworth reorganized and renamed itself, the retailer closed its Footquarters stores. But now they’re back — in a way.

A lot has changed in the footwear industry over the past decade. And today Foot Locker, Inc., is the parent of Foot Locker, Kids Foot Locker, Lady Foot Locker, Foot Locker Europe, Footaction and Champs Sports, as well as operating a Web site. Now, this year, the company is set to go forward with a reincarnation of Footquarters.

But whereas the 1995 Footquarters was basically an outworking of the Kinney restructuring as the company refocused on Foot Locker, the 2007 version is an integral part of the Foot Locker, Inc., business plan. Interest in expensive athletic shoes has waned, meaning the company can no longer rely on that. “There’s been a movement away from athletic footwear and toward lifestyle-related shoes, particularly when it comes to Foot Locker Europe, which represents the company’s most important segment,” said Shanley. “And in the U.S., Foot Locker, Footaction and the like are having trouble as the fashion shifts from high-priced shoes like Nike Air Jordans and Air Force Ones, which go for as much as $160, to street shoes such as Puma and Sketchers, or skate shoes like Vans and Etnies, all of which are closer to $50. The company’s going to have to sell three times as many pairs to make the same profits, and as a result they’ve cut the earnings guidance by half to reflect the shift.”

The company’s third-quarter numbers, released in late November, back up Shanley’s words. Gross margin as a percentage of sales through the third quarter was 29.3 percent, down from 30 percent for the year-ago period. The biggest decrease occurred in the third quarter itself — 29.5 percent, versus 30.5 percent 12 months before. Similarly, though overall athletic store sales edged up 0.2 percent through the third quarter, profit at the athletic division fell 11.7 percent. A sales decline at Foot Locker Europe was particularly significant, predicated by a reconcentration on lower-price shoes.

Foot Locker says it wants to regain ground with a new, albeit better planned, foray into the fashion footwear arena. Thus, some 50 to 60 percent of the merchandise at Footquarters will be branded sneakers, says Peter D. Brown, the company’s chief information officer, with the rest comprising non-sneaker shoes — some branded, some private-label. Generally, everything will cost somewhere between $35 and $50. “The Footquarters are something we’ve been thinking about for quite some time,” said Brown. “It’s intended to complement our other businesses, with lower price points aimed at our value-conscious customers. And while Foot Locker is targeted toward teen-agers, the Footquarters will serve an older customer base. Not old, mind you, just older than Foot Locker’s.”

Though Brown was willing to discuss the Footquarters concept and target demographic, he would not talk about store launches, target cities or neighboring/anchor store preferences. He did say that a tentative launch of 30 company-owned stores is set for April or May. Brown says the company hopes to spread the stores nationally and that it could roll out 30 or 40 additional stores this fall.

Each Footquarters unit will measure between 4,000 and 6,000 square feet, dwarfing the Foot Locker stores (which typically max out at the low end of that range), and will generally operate in the same types of centers as their predecessors. Further distinguishing Footquarters from the rest of the company’s holdings will be the shopping experience. Unlike Foot Locker, where shoes are displayed along the wall and sales staff bring selections from the back room, Footquarters will feature a self-service environment, with all the shoes out on the sales floor, says Brown.

Though the Footquarters business model differs greatly from the company’s other offerings, Brown describes it as a natural extension and says it will work. “It marks a move for us into the fashion industry, which is forever changing,” he said. “But we know the footwear business well, and we have the infrastructure in place. It doesn’t add a lot of costs for us.”

Shanley, though, questions this exploration of uncharted territory. “The new Footquarters are more like Famous Footwear or Shoe Carnival,” Shanley said. “Famous is doing well with women’s dress and casual footwear, not athletic shoes. In fact, both companies are decreasing their athletic sneaker offerings. But [Foot Locker] doesn’t have any experience in fashion; no one on the current staff has expertise in those areas. They need in-house people with knowledge, fashion flare and relationships in the Far East.”

It must also stem that tide of diminishing margins, which may have compelled it to dive headlong into something for which it is not fully prepared. Perhaps the most telling piece of information comes from Shanley. “I’ve spoken to Famous Footwear and Shoe Carnival,” he said. “And they’re not at all concerned.”

Which might be why Foot Locker, Inc., should be.