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Foot Locker Down 25% in a Month: Soft View the Sole Reason?

Zacks Equity Research

A glimpse of Foot Locker, Inc.’s FL share price movement reveals that it has plunged 25.2% in the past month compared with the Zacks categorized Retail-Apparel/Shoe industry’s decline of 5.9%. In contrast, the Zacks categorized Retail-Wholesale sector advanced 1.9%.

Further, a Momentum Score of “D” clearly indicates that the stock is likely to spiral downward in the coming days. Even a downtrend in the Zacks Consensus Estimate in the past 30 days portrays a dismal picture. Despite these ominous signs, we can’t ignore the initiatives undertaken by management to regain the lost momentum. Let’s delve deeper and find out more.

What's Troubling the Stock?

Foot Locker came under pressure, after this operator of athletic shoes and apparel retailer succumbed to a negative earnings surprise of 1.5% in the first quarter of fiscal 2017, following three successive quarters of earnings beat. Management informed that the delay in income tax refunds hurt the results. The New York-based company informed that the soft start witnessed in February was not fully offset by sturdy sales performance in March and April.

We noticed that Foot Locker’s total sales and comparable-store sales (comps) witnessed a marginal increase of 0.7% and 0.5%, respectively, which are in sharp contrast to the company’s performance in fiscal 2016. During the first, second, third and fourth quarters of last fiscal total sales increased 3.7%, 5%, 5.1% and 5.3%, respectively. Maintaining the same chronological order comps rose 2.9%, 4.7%, 4.7% and 5%, respectively.

Management now projects low-single-digit growth in comparable sales with a relatively flat earnings year over year for the second quarter. However, Foot Locker remains optimistic to attain mid-single digit comparable sales growth in the second half of 2017.

The company expects mid-single digits percentage increase in full-year earnings per share, excluding the 53rd week on the back of cost containment efforts and effective inventory management. The company in the recent past had projected double-digit growth in earnings per share for the fiscal year.

Analysts polled by Zacks are less constructive on the stock. In the past 30 days, the Zacks Consensus Estimate of $5.16 and $5.49 for fiscal 2017 and fiscal 2018 has declined 12 cents and 25 cents, respectively. Moreover, the Zacks Consensus Estimate for the second quarter has dropped 10 cents to 94 cents in the same time frame.

Initiatives Undertaken

Needless to say, management at Foot Locker is not sitting idle. Management is working on all aspects to attain mid-single digit earnings per share growth target for fiscal 2017 backed by effective implementation of operational and financial initiatives.

We believe by continually capitalizing on opportunities like children’s business, shop-in-shop expansion in collaboration with its vendors, store banner.com business, store refurbishment and enhancement of assortments, Foot Locker is likely to benefit in the long run. International expansion, especially in Europe, is another growth catalyst. Further, the company is enhancing eCommerce platform.

The company's long-term financial goals include attaining sales of $10 billion, sales per gross square foot of $600, operating margin of 12.5%, net income margin of 8.5%, and return on invested capital of 17%.

Key Picks

Investors may consider better-ranked stocks such as Best Buy Co., Inc. BBY, Big 5 Sporting Goods Corp. BGFV and The Children's Place, Inc. PLCE. All three of them flaunt a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Best Buy delivered an average positive earnings surprise of 33.8% in the trailing four quarters and has a long-term earnings growth rate of 11.8%.

Big 5 Sporting Goods delivered an average positive earnings surprise of 94.5% in the trailing four quarters and has a long-term earnings growth rate of 12%.

Children's Place delivered an average positive earnings surprise of 36.6% in the trailing four quarters and has a long-term earnings growth rate of 8%.

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