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What is Troubling Foot Locker? Are the Remedies Sufficient?

Zacks Equity Research

A glimpse of Foot Locker, Inc.’s FL share price movement unveils that it has plummeted 30% in the past three months compared with the Zacks categorized Retail-Apparel/Shoe industry’s decline of 5.8%. In contrast, the Zacks categorized Retail-Wholesale sector advanced 11.2%. Despite these ominous signs, we can’t ignore the initiatives undertaken by management to regain the lost ground.

What is Hurting the Stock?

Let’s delve deep and find out what all troubling this Zacks Rank #3 (Hold) stock.

First-Quarter Earnings Miss

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.

Decelerating Sales & Comps Growth

We noticed that Foot Locker’s total sales and comparable-store sales (comps) witnessed a marginal increase of 0.7% and 0.5%, respectively, in the first quarter of fiscal 2017, 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.

Not So Encouraging Outlook

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. Management 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.

Are the Remedies Sufficient?

Needless to say, management at Foot Locker is not sitting idle. The company 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%.

You Can Try These Stocks

If you are interested in the retail space you can consider stocks such as G-III Apparel Group, Ltd. GIII, Tilly's, Inc. TLYS and The Children's Place, Inc. PLCE. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

G-III Apparel has a long-term earnings growth rate of 15%.

Tilly's delivered an average positive earnings surprise of 120.4% in the trailing four quarters and has a long-term earnings growth rate of 13%.

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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