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Foot Locker (FL) Up 31.6% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Foot Locker (FL - Free Report) . Shares have added about 31.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Foot Locker due for a pullback? 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 drivers.

Foot Locker’s Q2 Earnings Beat Estimates, Increase Y/Y

Foot Locker came up with stellar second-quarter fiscal 2020 results, wherein the top and bottom lines outpaced the Zacks Consensus Estimate and grew year over year. Results benefited from the company’s sturdy efforts along with the digital business. Management also highlighted the huge response to the company’s assortment as stores started reopening. Furthermore, the company’s board reinstated the quarterly dividend program on robust liquidity and more stable cash outlook.

However, management did not update fiscal 2020 guidance on evolving pandemic-related uncertainties and its potential impact on the back-to-school season, team-sports participation and other government-stimulus packages. Foot Locker had withdrawn its fiscal 2020 guidance in March. Nevertheless, the company believes that it is well poised to maneuver amid the coronavirus pandemic.

Q2 Details

The athletic-shoes and apparel retailer posted adjusted earnings of 71 cents per share and outshone the Zacks Consensus Estimate of 69 cents. The bottom line also rose 7.6% year over year.

On a GAAP basis, the company reported earnings of 43 cents a share compared with 55 cents recorded in the prior-year period.

Total sales of $2,077 million grew 17.1% year over year and slightly came above the consensus estimate of $2,074 million. Excluding the effect of foreign-currency fluctuations, total sales rose 17.3%. Moreover, comparable-store sales jumped 18.6% during the quarter, against a decline of 42.8% witnessed in the previous quarter.

Foot Locker's gross-margin rate contracted 420 basis points (bps) to 25.9% during the quarter. However, SG&A expense rate fell 360 bps to 18.6%.

Store Update

During the reported quarter, Foot Locker opened 18 outlets, remodeled or relocated 26 stores, and shuttered 31. As of Aug 1, 2020, the company operated 3,100 stores across 27 countries in North America, Europe, Asia, Australia and New Zealand. Apart from these, there are 134 franchised Foot Locker stores in the Middle East and four franchised Runners Point stores in Germany.

Other Financial Details

The company ended fiscal second quarter with cash and cash equivalents of $1,373 million, long-term debt of $121 million, and shareholders’ equity of $2,403 million. The company has repaid the $330 million earlier borrowed from its credit facility.  As of Aug 1, 2020, merchandise inventories were $1,194 million, down 2.7% from the prior-year period. On a constant-currency basis, inventory declined 3.7%.

As part of its cash-preservation actions, management did not pay dividend or buy back shares in the reported quarter. However, it announced a quarterly cash dividend of 15 cents per share, payable Oct 30, 2020 to shareholders of record as on Oct 16.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -32.76% due to these changes.

VGM Scores

At this time, Foot Locker has a strong Growth Score of A, 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 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. 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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