Foot Locker Down 28% in 3 Months: Is a Turnaround Likely?

Foot Locker, Inc. FL have been performing unimpressively on the bourses for a while now. In the past three months, the company’s stock tumbled 28%, wider than the industry’s decline of 21.5%. Also, the stock underperformed the Zacks Retail-Wholesale sector’s decline of 1.2% and S&P 500’s fall of 0.7%. In fact, in the past month, shares of this New York-based company have plunged 22%. Let’s find out the reason behind the downward spiral.

The stock came under pressure following the company’s lower-than-expected first-quarter results and trimmed fiscal 2019 earnings view. Management now anticipates high-single digit increase in earnings per share for the fiscal year, down from the earlier projection of double-digit growth. (Read: Foot Locker Misses Q1 Earnings Estimates, Trims View)

Consequently, the Zacks Consensus Estimate has been witnessing a downtrend lately. We note that estimates for the current and next year have moved south by 17 cents and 22 cents to $5.02 and $5.44, respectively, over the past 30 days. Also, estimates for the current quarter have decreased by 15 cents to 66 cents.

A challenging retail landscape and changing consumer spending patterns are also making operating environment tough. Moreover, SG&A costs have been rising for a while due to sustained investments in augmenting digital capabilities. These investments are necessary to attain long-term goals but are weighing on margins in the short run.

During the first quarter, SG&A expense rate increased 100 basis points to 20% on account of sustained investments in augmenting digitization and infrastructure, wage pressure as well as higher incentive compensation expense. Further, management expects SG&A expenses to increase as a percentage of sales by 40-60 basis points during fiscal 2019. For the second quarter, Foot Locker expects SG&A expenses rate to increase 80-100 basis points.

In spite of the aforementioned hurdles, Foot Locker is trying to improve performance through operational and financial initiatives.

Can Efforts Aid Recovery?

Foot Locker is effectively managing inventory, investing in digital platforms and improving supply chain efficiencies. Management expects to benefit by consistently capitalizing on opportunities like kids’ and women’s business, shop-in-shop expansion in collaboration with vendors, store banner.com business, store refurbishment and enhancement of assortments.

Also, the company is focusing on augmenting e-commerce platform, expanding direct-to-consumer operations, tapping underpenetrated markets and opening Power Stores. Furthermore, it boasts a strong portfolio of leading brands under a variety of store banners that helps it to target specific markets and efficiently meet consumer demand.

Foot Locker’s comparable-store sales continue to increase. In the first quarter, the company’s comparable-store sales rose 4.6%. Management continues to expect mid-single digit comparable sales growth for fiscal 2019. The company registered comparable sales increase of 2.9% at its stores, while direct to customer channel sales surged 14.8%. Direct to customer business increased to 15.4% of total sales during the quarter, up from 13.9% in the year-ago period. For the second quarter, Foot Locker expects a low to mid single-digit gain in comparable sales.

We believe the aforementioned factors to provide cushion to this Zacks Rank #3 (Hold) stock and help it win back investors’ confidence.

Key Picks

The Children's Place, Inc. PLCE has a long-term earnings growth rate of 8% and carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

L Brands, Inc. LB has a long-term earnings growth rate of 11% and a Zacks Rank #2 (Buy).

Stitch Fix, Inc. SFIX has a long-term earnings growth rate of 22.5% and a Zacks Rank #2.

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