Foot Locker (FL) Stock Up 20% on Q2 Earnings & Sales Beat

Foot Locker, Inc. FL posted better-than-expected results for second-quarter fiscal 2022, wherein the top and the bottom line surpassed the Zacks Consensus Estimate. FL delivered the 9th straight earnings beat in the reported quarter.

Foot Locker’s FLX membership program and omni-channel capabilities appear encouraging. FL is positioned well for the back-to-school season on high-quality and new products. Concurrently, management announced Mary N. Dillon as the newly-appointed president, chief executive officer and a board member, effective Sep 1, 2022. Dillon is the former executive chair and CEO of Ulta Beauty.

Shares of this athletic footwear and apparel retailer rallied 20% during the trading session on Aug 19. Over the past three months, this Zacks Rank #3 (Hold) stock has increased 25.2% compared with the industry’s 9.4% rise.

Q2 Metrics

The athletic shoes and apparel retailer posted adjusted earnings of $1.10 per share, which surpassed the Zacks Consensus Estimate of 75 cents. The bottom line decreased from $2.21 per share recorded in the prior-year fiscal quarter.

Total sales of $2,065 million dropped 9.2% from the last fiscal year’s level but came above the consensus estimate of $2,052 million. Excluding the foreign-currency fluctuation impact, total sales dipped 6.1%. Digital penetration was 18.3% compared with 24.8% in fiscal 2021.

Comparable-store sales (comps) decreased 10.3% in the fiscal second quarter, with apparel majorly outpacing footwear. North America comps tumbled 16.1% year over year. The metric in Canada rose low-single digits while it decreased low double digits in the United States. Comps at Kids Foot Locker and Champs dipped in high teens. Comps in EMEA rose 4.5% with strength across markets, mainly in France, while the metric in APAC increased 17.7% with a robust performance in the Pacific and Asia regions.

WSS contributed $137 million to quarterly sales but comped down low-single digits, while atmos generated sales of $48 million and grew low-double digits. FL’s business at atmos is consistently delivering solid results. Solid omni-channel traffic in Japan and the key partner markets aided sales growth of atmos.

Management remains committed to the omni-channel progress. In the first week of the fiscal third quarter, it completed the global rollout of the new Foot Locker e-commerce platform via implementations in Singapore and Malaysia. FL’s FLX membership program has been impressive so far and is presently capturing above 70% of sales through its members in the United States, comparing favorably with 50% two years ago. FL expanded the FLX program in the six key countries in Europe.

An Insight Into Margins

Foot Locker's gross-margin rate in the reported quarter dropped 340 basis points (bps) from the prior-year quarter’s tally. Increased markdowns coupled with supply-chain costs and occupancy deleverage hurt the metric.

The SG&A rate was 21.3%, deleveraging nearly 210 bps due to increased labor and lower sales.

Store Update

During the fiscal second quarter, Foot Locker opened 34 stores, and remodeled or relocated 24 outlets. FL closed 50 stores during the aforementioned period.

As of Jul 30, 2022, Foot Locker operated 2,799 stores across 28 countries in North America, Europe, Asia, Australia and New Zealand.  Also, FL had 148 franchised stores operating in the Middle East and Asia.

For fiscal 2022, management expects to open roughly 100 stores, including 40 community and power outlets, 20 WSS stores and two atmos stores. It has plans to shut down nearly 190 stores.

Other Financial Details

Foot Locker ended the fiscal second quarter with cash and cash equivalents of $386 million. Long-term debt and obligations under finance leases amounted to $449 million, while shareholders’ equity summed $3,217 million. As of Jul 30, 2022, merchandise inventories were $1,644 million, up 52% from the year-earlier quarter’s end-level.

During the second quarter of fiscal 2022, Foot Locker repurchased 1.4 million shares for $40 million and paid out quarterly dividends of $38 million.

Outlook

Foot Locker is encouraged about its ability to accomplish earnings within the initial guided range. However, management expects witnessing more pressure in the back half of the current fiscal year. Consequently, FL now forecasts earnings at the lower end of the original guided range. FL envisions adjusted earnings per share of $4.25-$4.45 for the full fiscal compared with the upper end of $4.25-$4.60 projected earlier.

Management expects sales to decline 6-7% in fiscal 2022 compared with the earlier view that had indicated the upper end of the anticipated range of decline 4-6%. Currency is likely to act as a deterrent. Comps are likely to drop 8-9% compared with the prior guidance of 8-10%.

Gross margin is anticipated in the range of 31.1-31.2% compared with the prior view of 30.6-30.8%, backed by better occupancy trends and supply-chain costs, partly offset by increased markdowns. The SG&A rate is forecast to be 21.3-21.4% compared with the 20.7-20.9% rate guided earlier due to inflationary pressures.

Management predicts capEx at $275 million for fiscal 2022 due to store openings as well as technology and omni-channel investments.

3 Top Retail Stocks for You

We highlighted three better-ranked stocks in the Retail - Wholesale sector, namely Tecnoglass TGLS, Ulta Beauty ULTA and CVS Health CVS.

Tecnoglass manufactures and sells architectural glass and aluminum products for the residential and commercial construction industries. TGLS currently sports a Zacks Rank #1 (Strong Buy).

You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Tecnoglass’ current financial-year sales and earnings per share suggests growth of 28.2% and 47.7%, respectively, from the corresponding year-ago reported figures. TGLS has a trailing four-quarter earnings surprise of 24.4%, on average.

Ulta Beauty, a leading beauty retailer in the United States, currently has a Zacks Rank #2 (Buy). ULTA has a trailing four-quarter earnings surprise of 49.8%, on average.

The Zacks Consensus Estimate for Ulta Beauty’s current financial-year sales suggests growth of 10.4% from the corresponding year-ago reported figure. ULTA has an expected EPS growth rate of 10.7% for three-five years.

CVS Health, a pharmacy innovation company with integrated offerings across the entire spectrum of pharmacy care, currently has a Zacks Rank of 2. CVS has a trailing four-quarter earnings surprise of 6.7%, on average. The stock has risen 7% in the past three months.

The Zacks Consensus Estimate for CVS Health’s current financial-year sales and earnings per share suggests growth of 6.6% and 1.1%, respectively, from the corresponding year-ago reported numbers. CVS has an expected EPS growth rate of 7.7% for three-five years.

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