The improvements Foot Locker needs for a turnaround

Shares of Foot Locker (FL) are trading lower as the company posted its fourth quarter report. Despite beating expectations on the top and bottom lines, the footwear retailer offered weaker forecasts for full-year guidance, pushing back financial targets set by its CEO last year.

BTIG Consumer Retail and Lifestyle Brands Analyst Janine Stichter and Wedbush Securities Senior Equity Research Analyst Tom Nikic join Yahoo Finance to discuss Foot Locker's performance and future operations plans.

Stichter puts the company's performance into perspective: "I think it's all in the context of the go-forward outlook. For some perspective here, this is a stock that rose significantly into earnings, from a valuation standpoint was trading well above historical averages, so you had high expectations into the print. And I think they met that for Q4, but the challenge is really the go-forward outlook which came in significantly below consensus, and when you break it down with the color they gave on the call, a lot of that improvement that they're expecting is really in the back half of 2024, so we're not getting any immediate improvement. The first half of the year numbers need to come down."

While Nikic explains that trimming inventory could be a vital move, Nikic also speaks to the benefit of store closures: "As far as underperforming stores go, this company has been a net store closer for as long as I can remember. I think every year since 2007, I believe, if you don't include acquisitions they've made, they've been a net closer of stores. So they're continually improving the store fleet and saying we want to be a little bit more prudent with the size of the store fleet and having fewer, but bigger and more productive, stores. It's the right thing to do, but it does cause some near-term pain. "

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

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BRAD SMITH: Foot Locker's shares slipping this morning. As you're seeing, shares down by 27% under pressure on its quarterly results here. Despite beating the Street's expectations on the top and bottom line, the footwear retailer forecasting weaker full-year guidance and pushing back financial targets, CEO Mary Dillon outlined last year.

For more, we're joined by Janine Stichter, who is the BTIG consumer retail and lifestyle brands analyst. Plus, we've got Tom Nikic, who is the Wedbush Securities senior equity research analyst for apparel and footwear. Great to have you both here with us.

First and foremost, Janine, I've got to go to you on this one. You see a report like this come across, the outlook a little sketchy, perhaps. And we're taking a look at shares moving down 27%. What's the Street latching onto here from your perspective?

JANINE STICHTER: Yeah, I think it's all in the context of the go-forward outlook. I mean, for some perspective here, this is a stock that rose significantly into earnings, and from a valuation standpoint was trading well above historical averages. So you had high expectations into the print.

And I think they met that for Q4, but the challenge is really the go-forward outlook, which you mentioned came in significantly below consensus. And when you break it down with the color they gave on the call, a lot of that improvement that they're expecting is really in the back half of 2024. So we're not getting immediate improvement.

The first half of the year numbers need to come down. And then as we think about their '28 outlook that they're pushing out two years, a lot of that improvement is also going to come in 2026 through 2028. So we're really not getting the improvement that we would have expected. It's all taking more of a delay than we would have thought coming into this print.

SEANA SMITH: Tom the strategy that is taking place right now, sacrificing margins, at least in the most recent quarter here, in order to clear some of that excess inventory, is that a strategy that makes sense? And is it one that we could then expect going forward, given that they are a little bit more behind than initially thought in this turnaround story?

TOM NIKIC: Yeah, I mean, look, they very clearly had too much inventory. I mean, you know, you would walk through the stores during the holiday season, and, you know, I've never, you know, felt as claustrophobic in a Foot Locker store as I did, you know, walking through the stores in November and December.

So it made perfect sense for them to try to, you know, get their inventory cleaner. I think one of the issues, and this, you know, alludes to what Janine said about the back half weighted guidance, you know, they're also assuming that, you know, sales trends will get better as the year goes on as they start discounting less and less. That is somewhat of a risky proposition because, you know, consumers like discounts.

And, you know, when you train a consumer to look for discounts, it can be very difficult to rip that Band-Aid off. So I think that's another reason why you see the stock under so much pressure today.

BRAD SMITH: Tom, just to follow up on that-- and I will add that my own visits and Yahoo Finance's informal channel checks to the stores revealed the same thing. I'm seeing some models that have come out a year, maybe a year and a half ago still on shelves right now. What is their plan to not only move through inventory, but also for the stores that are underperforming and not profitable, make sure that they're kind of identifying where there needs to be a significant shift in the amount of overhead they're putting out there and the expenses and square footage operated and the inventory that goes into those new experiences?

TOM NIKIC: Yeah, so look, they did say that the merchandise margin pressure and the gross margin pressure will continue into Q1, so essentially saying that, you know, now in the early part of 2024, you'll continue to see that discounting to move on from inventory. As far as, you know, underperforming stores go, I mean, look, like, this company has been a net store closer for as long as I can remember.

You know, I think every year since 2007, I believe, like, if you don't include acquisitions that they've made, they've been a net closer of stores. So they're continually, you know, pruning the store fleet and kind of saying, OK, yeah, you know, we want to, you know, be a little bit more prudent, you know, with the size of the store fleet and having, you know, fewer but bigger and more productive doors. I think it's the right thing to do, you know, but it does cause some near-term pain.