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Can Growth Efforts Bring Foot Locker (FL) Back on Track?

Zacks Equity Research

Shares of Foot Locker, Inc. FL have dipped 31.7% in the past six months, underperforming the industry’s decline of 5.4%. The stock has slid roughly 22%, following the company’s second-quarter fiscal 2019 results, wherein sales and earnings per share fell year over year. We note that its comparable-store sales (comps) growth rate decelerated on a sequential basis and gross margin contracted.



As a result, the Zacks Consensus Estimate for earnings has been trending south. Over the past 60 days, the Zacks Consensus Estimate for the current quarter and fiscal 2019 has moved down by 3 cents and 10 cents to $1.07 and $4.94, respectively.

Moving on, SG&A costs have been rising for a while due to sustained investments to augment digital capabilities and higher incentive compensation costs. The metric is expected to increase 30-50 basis points in fiscal 2019. This may keep margins under pressure in the short run.

These apart, rate of comps growth has fallen on a sequential basis. Comps rose 0.8% in the fiscal second quarter, following an increase of 4.6% in the preceding quarter. However, management hinted that the rate is likely to accelerate in the third quarter. Foot Locker expects to attain mid-single-digit comparable sales growth in the third quarter and fiscal 2019.

Let’s delve deeper into efforts undertaken to revive the stock.

Revival Strategies

The company is trying to improve performance through operational and financial initiatives.  It remains focused on supply-chain development, improvement of mobile and web platforms, and expansion of data analytics capabilities. Management believes that the company is likely to benefit from kids’ and women’s businesses, shop-in-shop expansion in collaboration with its vendors, the store banner.com business, store refurbishment, and enhancement of assortments.

It is also focusing on augmenting its e-commerce platform, growing direct-to-consumer operations, tapping underpenetrated markets and opening of Power Stores. It earlier outlined plans to open more than a dozen power stores in fiscal 2019.

In sync with its expansion plans, the company has rolled out new membership program FLX at Lady Foot Locker in the United States and Foot Locker Netherlands, and plans to expand the same across U.S. banners after the holidays. In Europe, the rollout is likely to commence by the early fourth quarter and continue through fiscal 2020, with the Asia Pacific to follow later.

Apart from this, the company has been making investments. Foot Locker entered a partnership with Nike, Inc. NKE for a pop-up store called Sneakeasy NYC and made an investment of $15 million in Carbon3(NKE8. It also acquired a minority interest in Goat by investing $100 million. Further, Foot Locker invested $3 million in Super Heroic, a kid’s footwear brand, and $12.5 million in Rockets of Awesome, a children's apparel company. These investments widen Foot Locker’s scope to expand products and brands, access new business segments, and take advantage of innovative technologies.

Bottom Line

All said, we hope that the above-mentioned initiatives will act as tailwinds and provide some cushion to the Zacks Rank #3 (Hold) stock in the near future.

Other Stocks to Consider

Capri Holdings CPRI has a long-term earnings growth rate of 5.7%. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank  stocks here.

Zumiez Inc ZUMZ delivered average positive earnings surprise of 46.3% in the trailing four quarters. It has a long-term earnings growth rate of 13.5% and a Zacks Rank #2 (Buy).

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