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Can Foot Locker (FL) Turn Things Around with Upcoming Q3 Earnings?

Christopher Vargas

Foot Locker FL will report its Q3 financial performance before the market opens on Friday, November 22. The sneaker retailer has struggled to keep up with the broader market this year as it lags behind the S&P 500’s 23.3% rise, with its over 18% decline.

Foot Locker is coming off a second quarter where it reported a mixed bag of results that sent its shares lower. To combat this, the company has adopted efforts to better adapt itself to the contemporary consumer.

Foot Locker Rejuvenates Itself

In an effort to better market itself to the modern consumer, Foot Locker has undergone several initiatives to revamp its in-store experience. Foot Locker announced the grand opening of its Washington Heights community-based Power Store in New York. The 9,000-square-foot store is the first among Foot Locker stores to showcase the Nike NKE App at Retail digital technology.

The Nike App at Retail allows users to look for their favorite brands in the Foot Locker store with all the information needed to get the best experience possible. Users can scan to see if an item is in stock, or they can reserve it for pick-up in-store. The NikePlus Unlock Box in the app works like a vending machine through which users can unlock free limited-edition items, while the "Shoecase" capability gives app users early access to coveted sneaker releases.

Foot Locker hopes the exclusive access the app provides will bring more hardcore sneaker fans into its stores, while the user-friendly accessibility attracts the casual shopper. Foot Locker is also doubling down on its exclusive merchandise by offering local brands that can only be found at its Foot Locker Power stores. The local merchandise is part of its “Home Grown” initiative that gives customers an exclusive taste of the local fashion, which might encourage the trendy customer to visit.

Will the Modernization Yield Results?

Foot Locker is playing on the exclusiveness to bring in customers who want to find unique looks that are only available to a select few. Only those who visit Foot Locker Power stores gain access to the local brands and can use the Nike digital app. Foot Locker is operating Power Stores in Detroit, Philadelphia, London, Liverpool, and Hong Kong and plans to open stores in Los Angeles and Vancouver, Canada as well.

The Foot Locker Power store seems like a great concept that brings digital shopping to its brick and mortar locations. The initiative seems poised to win over athleisure consumers with its enticing exclusive offerings, which might help Foot Locker gain stream into the upcoming holiday shopping season.

However, the new initiatives have come at a price, as Foot Locker’s gross margin rate decreased and its general and administrative expenses rose in Q2. Foot Locker’s investments in its digital capabilities and infrastructure have started to weigh on its margins but the athleisure retailer hopes investors can bear with the short-term losses and keep their sights set on the long-term picture.

Our Q3 consensus estimates forecast a bottom-line hike of 12.63% to $1.07 per share and a sales jump of 4.31% to $1.94 billion. Same store sales in the third quarter are projected to come in at 4.3% and six more stores are estimated to be added. Looking ahead to the full fiscal year, estimates call for EPS to grow 4.9%, while sales pop 2.14% and comp sales reach 2.8%.

Bottom Line

Foot Locker’s revamping efforts look good on paper but time will tell if they can bear fruit. As far as its ability to finance the restructuring, the retailer is in good shape as it reduced inventory in Q2 and the company's cash totaled $939 million, while the debt on its balance sheet was $123 million.

Foot Locker pays out a dividend with a solid 3.48% yield that can anchor returns for shareholders. On top of its healthy dividend payouts, the pull back in Foot Locker’s stock has it trading at a level well below the industry average. The current valuation can be a solid buying opportunity for those feeling optimistic about the company’s outlook. Foot Locker sports a Zacks Rank #3 (Hold).

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