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Why Is Foot Locker (FL) Down 4.2% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Foot Locker (FL). Shares have lost about 4.2% 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 the most recent earnings report in order to get a better handle on the important drivers.

Foot Locker Q1 Loss Wider Than Expected, Sales Tank Y/Y

Foot Locker, Inc. came up with first-quarter fiscal 2020 results, wherein it reported wider-than-expected loss per share. Also, sales missed the Zacks Consensus Estimate, marking the fifth consecutive quarterly miss. Both top and bottom lines also fell year over year. Additionally, comparable-store sales declined year on year.

Nevertheless, management noted that the company is on track with the reopening of stores in phased approach. As of now, the company has reopened more than 1,400 stores. Also, the company has taken measures to strengthen its financial position in the wake of coronavirus crisis. The measures include borrowing $330 million under its $400-million credit facility, curbing non-essential spending, extending payment terms, limiting merchandise purchases and reducing salaries and compensation.

Moreover, it cut the capital expenditure forecast by 50% to $138 million for fiscal 2020. Included in this new plan are 28 new stores and 47 remodels or relocations of existing stores, down from the 65 new stores and 125 remodels or relocations planned in the beginning of the year. The company halted share repurchase program and suspended quarterly cash dividend.

Q1 Details

This operator of athletic shoes and apparel retailer posted adjusted loss of 67 cents per share, wider than the Zacks Consensus Estimate of a loss of 17 cents. The company had reported adjusted earnings of $1.53 recorded in the prior-year quarter.

On a GAAP basis, the company reported a loss of 93 cents a share compared with the $1.52 recorded in the prior-year period.

Total sales of $1,176 million plummeted 43.4% year over year and also fell short of the consensus estimate of $1,315 million. Excluding the effect of foreign-currency fluctuations, total sales plunged 42.9%. Moreover, comparable-store sales declined 42.8% during the quarter, significantly wider than the 1.6% fall witnessed in the previous quarter. Stores registered a 53.4% comp decline, while DTC channel strengthened and posted a 14.3% gain. As a percent of sales, DTC rose to 30.8% of sales, up from 15.4% last year.
 
Foot Locker's gross margin rate contracted significantly to 23% from 33.2% during the quarter due to deleverage in occupancy and buyers compensation expenses and lower merchandise margin. Further, SG&A expense rate expanded 690 basis points to 26.9%.

Store Update

During the reported quarter, Foot Locker opened five outlets, remodeled or relocated nine stores, and shuttered 21. As of May 2, 2020, the company operated 3,113 stores across 27 countries in North America, Europe, Asia, Australia and New Zealand. Apart from these, there are 54 franchised Foot Locker stores in the Middle East and four franchised Runners Point stores in Germany.

Other Financial Details

Foot Locker ended the fiscal first quarter with cash and cash equivalents of $1,012 million, long-term debt of $121 million, and shareholders’ equity of $2,326 million. It had a debt of $451 million, including $330 million borrowed from the company's credit facility. As of May 2, 2020, merchandise inventories were $1,458 million, up 20.4% from the prior-year period. On a constant-currency basis, inventory rose 21.3%.

Management incurred capital expenditure of $52 million during the quarter. The company posted negative free cash flow of $174 million.

During the fiscal first quarter, management paid a quarterly dividend of 40 cents per share. However, the company’s board has decided to temporarily put cash dividend on hold starting the fiscal second quarter. Also, it has suspended its share-repurchase program for the time being.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review. The consensus estimate has shifted -44.77% due to these changes.

VGM Scores

Currently, Foot Locker has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. 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. It's no surprise Foot Locker has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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