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Why Is Foot Locker (FL) Down 33.6% 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 33.6% 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 catalysts.

Foot Locker Q4 Earnings Beat Estimates, Comps Decline

Foot Locker, Inc. came up with fourth-quarter fiscal 2019 results, which display the second straight quarter of an earnings beat but the fourth consecutive revenue miss. While the bottom-line increased year over year, top line came below the prior-year reported number. Also, comparable-store sales declined, following an increase in the preceding quarter.

Management highlighted that the company witnessed weaker-than-expected demand and highly promotional environment for apparel during the festive season. Consequently, the actions undertaken to manage slower moving items hurt gross margin rate during the quarter under review. Nonetheless, efficient cost management did provide cushion to the bottom line.

This operator of athletic shoes and apparel retailer posted adjusted earnings of $1.63 per share that came ahead of the Zacks Consensus Estimate of $1.58. The quarterly earnings increased 4.5% from the prior-year period reported figure of $1.56. This can be attributed to lower cost of sales and SG&A expenses as well as share repurchase activity.

Total sales of $2,221 million declined 2.2% year over year and also fell short of the consensus estimate of $2,236.9 million. Excluding the effect of foreign currency fluctuations, total sales decreased 2%.

Comparable-store sales slid 1.6% during the quarter under review. This compares unfavorably with an increase of 5.7% in the preceding quarter and 9.7% in the year-ago period. Direct-to-customer channel comps were down 4.3%. DTC business penetration was 18.7% of total sales during the quarter versus 19.1% in the year-ago period.

Foot Locker's gross margin rate contracted 90 basis points to 31.5% during the quarter on account of 70 basis point decline in merchandise margin rate and 20 basis points deleverage in occupancy and buyers’ compensation expenses.  We note that SG&A expense rate declined 50 basis points to 19.4%. Management had earlier projected gross margin contraction of 10-30 basis points and SG&A rate to be flat to up 10 basis points for the fourth quarter.

Store Update

During the quarter, Foot Locker opened 32 new outlets, remodeled or relocated 66 stores, and shuttered 63. As of Feb 1, 2020, the company operated 3,129 outlets across 27 countries in North America, Europe, Asia, Australia and New Zealand. Apart from these, there are 130 franchised Foot Locker stores in the Middle East. Germany has nine franchised Runners Point stores.

Other Financial Details

Foot Locker ended the quarter with cash and cash equivalents of $907 million, long-term debt of $122 million, and shareholders’ equity of $2,480 million. During the quarter, the company repurchased 881,423 shares for $35 million. The company had $867 million remaining under $1.2 billion share repurchase program. The company raised the quarterly dividend payout by 5% to 40 cents a share.

Management incurred capital expenditure of $187 million in its store fleet, digital platforms, supply chain and logistics capabilities, and other infrastructure during fiscal 2019.

The company’s board of directors approved a $275 million capital expenditure plan for fiscal 2020, targeting to deliver organic growth across its business. Planned investment for the fiscal signifies higher spending toward community-based power stores in markets worldwide, apart from investments to enhance core stores. Through this spending, the company will continue focusing on digital advancement and enhancement of its U.S. supply chain.

Management plans to spend roughly $150 million on improvement of store fleet, including 65 new stores with further expansion in Asia and approximately 125 remodels or relocations of existing stores. The company intends to close approximately 150 stores.

Outlook

Management envisions comparable sales to be up low-single digits and earnings per share to increase in the low-to-mid single digit range during fiscal 2020. Adverse currency fluctuations will remain a top line headwind. It anticipates, gross margin improvement of 10-30 basis points driven by improvement in merchandise margin rate. For fiscal 2020, Foot Locker expects SG&A rate to be up 40-60 basis points due to ongoing investments in digital capabilities and increase in minimum wage rate.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -18.31% due to these changes.

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

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 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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