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Foot Locker: A Slow Path to Recovery

The brick-and-mortar retail industry has been among the worst-hit sectors as a result of the Covid-19 pandemic. Even with the phased lifting of the lockdown and stores opening up, footfalls continue to be slow.

Footwear and sports apparel retailer Foot Locker Inc. (NYSE:FL) is one such business, and this showed in its most recent results. The company has re-opened about 45% of its stores and expects business to slowly start picking up in the coming quarters.

After the suspension of dividends, the company is not a yield play for the time being, but I think the management is coping well with the lockdown situation. In light of this, a stock price revival can be expected in the near future, in my opinion.

Company overview

Foot Locker is a leading retailer of athletic footwear, apparel, accessories and equipment across the globe with a presence in about 27 countries spread across North America, Europe, the Middle East, Africa and the Asia Pacific region. It is one of the oldest footwear retailers in the U.S., founded way back in 1879. It operates over 3,000 stores directly, as well as a strong franchising business.

The company focuses on athletically-inspired footwear, and most of its supplies come from Nike (NYSE:NKE). The company has a wide variety of store brands such as Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Eastbay, Footaction, Runners Point and Sidestep. It has a strong e-commerce business through its Footlocker, Eastbay and Final-Score websites. Foot Locker has its headquarters in New York.

Quarterly results

Foot Locker's numbers were worse than what analysts had predicted. The company reported revenue of $1.18 billion, which was below the analyst consensus estimate of $1.36 billion. This was a 43.4% drop compared to the $2.1 billion reported in the prior-year quarter. The company's gross margin also declined from 33.2% to 23%. In terms of the bottom-line, Foot Locker reported a net loss of $98 million, or $0.93 per share, compared to net income of $172 million, or $1.52 per share, in the corresponding period of 2019.

The results seem to be factored into the stock price, though there has been some recovery from lows of around $21 to the current level of around $28.

The decision to suspend the quarterly dividend appears to be a wise one given the cash flow situation, even though it might drive away some yield investors. However, the slow recovery points towards the fact that the market is not optimistic about the company or the retail industry as a whole.

Phased store openings

Foot Locker has commenced the process of re-opening its stores in a phased manner and has already opened about 45% of the total company stores. The store re-openings have been situational so far, depending on factors such as the support of the local community in terms of order placing.

Long-term impacts include an anticipated 150 to 170 permanent store closures. The company's strong relationship with Nike, which accounts for more than half of its total revenues, should play a key role in determining to the time to recovery.

Key takeaways

The Foot Locker management has taken some prudent financial decisions such as the suspension of the dividend and the plan to cut capex in half for the year. Originally, the management planned to open 65 new stores and remodel 125 stores, but now the plan has changed to about 28 new openings and 47 remodels.

In order to have a strong buffer in terms of financing, the management has already drawn $330 million out of the $400 million credit facility to handle the cash losses. The inventory management has been good, and there has not been a significant rise in inventory levels as compared to the previous year. Overall, I think the management is doing its best to counter the crisis.

Disclosure: No positions.

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This article first appeared on GuruFocus.