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Why Is Foot Locker (FL) Down 5.1% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Foot Locker (FL). Shares have lost about 5.1% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Foot Locker due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Foot Locker Q2 Earnings Meet, Revenues Miss

Foot Locker, Inc. came out with its second-quarter fiscal 2019 results, wherein the bottom line met the Zacks Consensus Estimate but the top line fell short of the same for the second quarter in row. Also, both sales and earnings per share declined year over year. We note that the rate of growth of comparable-store sales decelerated sharply on a sequential basis. Moreover, gross margin remained under pressure. Management stated that results came in at the low end of expectations.

This operator of athletic shoes and apparel retailer reported adjusted earnings of 66 cents a share that came in line with consensus mark. However, it declined 12% from the year-ago period. This can be attributed to lower sales and higher SG&A expenses.

The company generated total sales of $1,774 million that fell 0.4% year over year and came below the consensus estimate of $1,828 million. We note that adverse currency fluctuations hurt net sales by $22 million. Excluding the effect of foreign currency fluctuations, total sales rose 0.8%.

Meanwhile, comparable-store sales rose 0.8% during the quarter under review, following an increase of 4.6% in the preceding quarter. By month May comparable sales were down low single-digits, June was up low single-digits, and July was stronger producing a mid-single-digit increase. Comparable sales decreased 0.1% at its stores, while direct to customer channel sales increased 6.5%. DTC business increased to 14.3% of total sales during the quarter, up from 13.5% in the year-ago period.

Foot Locker's gross margin rate contracted 10 basis points to 30.1% during the quarter. Merchandise margin rate shriveled 20 basis points due to the higher mix of DTC, which carries higher freight costs.

We note that SG&A expense rate deleveraged 90 basis points to 22.2% due to strategic investments in digital capabilities and infrastructure as well as wages. Management had earlier projected gross margin to be flat to down 20 basis points and SG&A expenses rate to increase 80-100 basis points in the second quarter.

Store Update

During the quarter, Foot Locker opened 10 new outlets (two power stores), remodeled or relocated 35 stores, and shuttered 37 (including 23 SIX:02 locations). As of Aug 3, 2019, the company operated 3,174 outlets across 27 countries in North America, Europe, Asia, Australia and New Zealand. Apart from these, there are 123 franchised Foot Locker stores in the Middle East. Germany has 10 franchised Runners Point stores.

The company now intends to open approximately 65 stores comprising new power stores in Frankfurt and Melbourne during the fiscal year. It plans to remodel or relocate 160 stores and close 170 stores.

Other Financial Details

Foot Locker ended the quarter with cash and cash equivalents of $939 million, long-term debt of $123 million, and shareholders’ equity of $2,512 million. During the quarter, the company repurchased 2.9 million shares for $120 million under its $1.2 billion share repurchase program.

Management incurred capital expenditure of $36 million during the quarter. Foot Locker plans to make capital expenditures of $250 million during fiscal 2019.

Guidance

Foot Locker remains optimistic about attaining mid-single digit comparable sales increase and high-single digit adjusted earnings per share growth in fiscal 2019. For the third quarter, management expects mid-single-digit gain in comparable sales.

Foot Locker expects gross margin to be up 10-30 basis points and SG&A expense rate to increase 30-50 basis points for fiscal 2019. Gross margin is projected to expand 10-30 basis points, while SG&A expense rate is likely to decrease 10-30 basis points in the third quarter.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

Currently, Foot Locker has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Foot Locker has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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