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Foot Locker Is Ready for a Sales Rebound

Demitrios Kalogeropoulos, The Motley Fool

Back in early March, Foot Locker (NYSE: FL) told investors that it saw reasons for optimism that the company would return to modest sales and profit growth at some point in 2018. The footwear retailer had a brutal 2017, after all, as revenue dipped and gross profit margin fell to 31.6% of sales from 33.9% in the prior year.

But executives noted progress at moving through stale inventory over the holiday quarter just as key suppliers like Nike were ramping up their innovative releases.

Foot Locker's first-quarter earnings report, released on Friday, built on that momentum and kept the company on track for accelerating operating improvements by late 2018. 

Let's take a closer look.

By the numbers

 Metric

Q1 2018

Q1 2017

Year-Over-Year Growth

Revenue

$2 billion

$2 billion

N/A

Net income

$165 million

$180 million

(8%)

Earnings per share

$1.38

$1.36

2%

Data source: Foot Locker's financial filings.

What happened this quarter?

Sales and profits both declined, but at a more modest pace than management had projected as selling conditions improved in the industry.

A runner laces up his shoes.

Image source: Getty Images.

The key highlights of the quarter:

  • Comparable-store sales dropped 2.8% to mark a slight improvement over the prior quarter's 3.7% slump. Excluding foreign exchange rate shifts, overall revenue fell by a more modest 1.5% thanks to an expanding global store base.
  • Gross profit margin fell, but at a slower rate than in past quarters. The metric declined to 32.9% from 34% a year ago, while over the holiday season it had dropped to 31.4% from 33.7%.
  • Operating income worsened to $229 million from $269 million due to the lower sales base, reduced gross profitability, and extra costs associated with investments into the digital sales channel.
  • A lower tax burden protected net income from a sharp decline, and earnings increased slightly on a per-share basis thanks to aggressive stock repurchase spending.
  • Inventory levels dropped 7%, and Foot Locker remains in a solid financial position, with cash holdings of roughly $1 billion and debt of just $125 million.

What management had to say

Executives said the tough decisions they've made to clear out inventory over the past few quarters have started to pay dividends. "The team did an excellent job in managing our inventories and helping to clear slow-moving product in a promotional environment," CFO Lauren Peters said in a press release, "giving us the flexibility to flow in fresh and exciting product."

The introduction of premium releases from Nike and other suppliers lifted demand and helped support profitability, leading to "first quarter results which were above our expectations," CEO Richard Johnson said.

Growth is on the way

Johnson and his team believe this positive momentum will continue, and Foot Locker's current light inventory position should make it even easier for management to flood its shelves with fresh products. Thus, while the retailer didn't update its 2018 projection, it seems likely that it will at least meet its goal of returning to sales growth this year while gross profit margin begins to recover from the painful 2.3 percentage-point decline that occurred in 2017.

In early March, executives said they believed the sales pace would improve early in 2018 before strengthening significantly heading into the core holiday season rush. That optimistic outlook looks more achievable now that prices are firming up, inventory levels are healthy, and new products are surging into the market.

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Demitrios Kalogeropoulos owns shares of Nike. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.