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Better than feared financials are fueling Foot Locker’s stock surge. But we’ll take it
Foot Locker (FL) reported quarterly results that can only be described as better than feared: Nearly all of the important metrics came in weaker than a year ago, but they weren’t as terrible as expectations on Wall Street. The stock rose more than 15% on those surprise beats. Total revenue in the third quarter fell 8.6% year over year to $1.99 billion, outpacing the LSEG compiled consensus analyst estimate for $1.96 billion. Adjusted earnings-per-share dropped 76% to 30 cents. However, that EPS number was better than estimates, according to LSEG, formerly known as Refinitiv. FL YTD mountain Foot Locker YTD Also a positive — or rather less negative than estimated — was an 8% decline in same-store sales, which included a hit of three percentage points from revamping its Champs Sports retail stores to include more performance and athleisure products. While Wednesday’s surge put Foot Locker’s quarter-to-date gains at nearly 60%, the stock was still down roughly 27% in 2023. Bottom line As noted previously , and Foot Locker is a prime example, better-than-feared is sometimes all you need for a stock to rally in a market that has been focused on only a handful of mega-cap names for nearly a year. Regarding management’s Lace Up turnaround strategy, we look forward to the new app coming in 2024. We’re also pleased to hear about new training and tools to help employees drive sales in stores and online. While only recently implemented, CEO Mary Dillon said customer engagement and in-store conversions have improved. Digital penetration was also up in the quarter, improving 150 basis points versus last year, excluding the impact of the shutdown of Eastbay. The rollout of new handheld devices in North American stores is helping employees better track inventory levels, access product information, and check out customers. The initiative is also leading to improved in-store conversion. Better sales guidance than previously forecast and only a slightly worse earnings outlook also helped juice shares of Foot Locker. In our view, this is appropriate because Foot Locker is a turnaround story. It’s understood by investors that cost dynamics are going to fluctuate as the timing of store closures as well as efforts to reinvigorate brands and reduce the reliance on Nike (NKE) proceed. It also means that demand, which is reflected through sales, is the primary concern for investors as this is what we can look to get a sense of what earnings may look like once the turnaround efforts are complete. While leaving our 4 rating on the stock unchanged, the signs of progress are encouraging. Should we see some follow-through in the key holiday quarter, we may become more upbeat about the company’s longer-term prospects under Dillon, whose track record of overhauling Ulta Beauty (ULTA) was a key reason we bought Foot Locker in the first place. Guidance In addition to the reported results, management updated their outlook for the full fiscal year. On the plus side, total sales are now expected to decline between 8% and 8.5% instead of 8% to 9% as previously forecast. Same-store sales are now expected to be down 8.5% to 9% versus down 9% to 10% previously. Management also shaved their capital expenditures guide for the year to $275 million from $290 million due to a shift in the timing of real estate projects. On the other hand, the gross margin guidance was a slight negative, now expected to fall somewhere in the range of 27.8% to 27.9% compared to 27.8% to 28% previously. SG & A (selling, general and administrative) costs as a percentage of revenue are going to be about 50 basis points higher than previously expected at the midpoint. Adjusted EPS is now expected to fall in a range of $1.30 to 1.40 down from the $1.30 to 1.50 range previously forecast. Encouragingly, Dillon noted that “trends in the quarter accelerated from our first half run rate driven by a strong back to school in our kids Foot Locker banner. We also delivered sequential improvement in our conversion rates across cores and our digital channel outperformed our expectations including a positive trend in October.” As a result, the team is expecting some slowing in the rates of decline in the current holiday quarter versus what we got in the third quarter. Sales are expected to fall 2% to 4% and same-store sales are expected to be down 7% to 9% — better than the 6.4% and 10.8% declines the Street was modeling into the release, respectively. On the other hand, EPS is expected to be between 26 cents and 36 cents per share, a penny short of expectations, at the midpoint, as the team looks to “balance early successes” in their turnaround efforts with the uncertainty they’re seeing in the “external environment and our internal inventory goals.” On the post-earnings call, management said current-quarter trends have thus far been positive — adding that over the Thanksgiving week, the company saw “solid traffic levels and conversion gains in our stores and online.” The team said, “While customers responded to our competitive offers we also saw nice gains in ticket and basket size as our customer is willing to pay full price when the product is new, compelling, and trend right. While we’re encouraged by our building momentum we acknowledge that much of the holiday season is still ahead of us and we factored in our quarter-to-date performance into our fourth-quarter plans.” Quarterly commentary As we can see in the earnings table, same-store-sales, the key performance indicator for retail names, were down a less-than-expected 8% in the third quarter. Looking at the month-by-month breakdown in Q3, CFO Michael Baughn said, “August comps were down high single digits, September also was down high single digits and October declines moderated to down mid-single-digits. While traffic and conversion remain headwinds year-over-year in the third quarter, we saw steady improvements in our conversion.” Under the Sales by Geography line item, North America was down 10% in Q3 to $1.46 billion, EMEA (Europe, Middle East, and Africa) edged down 1.2% and the Asia Pacific region declined 14.4% versus the year-ago period. While operating and free cash flow came up short of expectations in Q3, they were both positive at $86 million and $26 million, respectively — a reversal from what we saw in the first six months of 2023. Cash and equivalents on the balance in Q3 ticked up to $187 million from the $180 million we saw in the second quarter. (Jim Cramer’s Charitable Trust is long FL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Shoppers leave the American multinational sportswear and footwear retailer, Foot Locker store in Spain.
Xavi Lopez | Lightrocket | Getty Images
Foot Locker (FL) reported quarterly results that can only be described as better than feared: Nearly all of the important metrics came in weaker than a year ago, but they weren’t as terrible as expectations on Wall Street. The stock rose more than 15% on those surprise beats.
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