It has been about a month since the last earnings report for Foot Locker (
FL Quick Quote FL - Free Report) . Shares have added about 9.2% 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 ( FL Quick Quote FL - Free Report) Beats on Q4 Earnings, Sales Down
Foot Locker reported fourth-quarter fiscal 2020 results, wherein both top and bottom line declined year over year. Moreover, the top-line missed the Zacks Consensus Estimate. Markedly, the company witnessed top-line headwinds owing to pandemic-related store closures across Europe and Canada, and inventory delay on congestion at the domestic ports. Moreover, comparable-store sales (comps) declined 2.7% year over year, mainly owing to pandemic-induced store closures and backlog at the U.S. stores with lower traffic in the company’s largest global tourist markets.
Nevertheless, a robust product pipeline, impressive holiday campaign and solid customer demand were upsides during the quarter. The company experienced strong full price sell-through, healthy margins and improved inventory productivity in the reported quarter. Moreover, its digital business acted as a catalyst through the fourth quarter, witnessing double-digit growth with strength across the board. It saw digital increase in triple-digits across the regions heavily affected by store closures. In addition, Asia Pacific was the company’s fastest-growing geography globally, backed by robust growth in Australia and New Zealand. Currently, above 10% of the company’s store fleet is temporarily shut on COVID-19 restrictions. However, management believes that strength in the company’s financial position will help it navigate the macro challenges. Given the pandemic uncertainties, management did not provide fiscal 2021 guidance. Q4 Metrics
The athletic shoes and apparel retailer posted adjusted earnings of $1.55 per share, which outshone the Zacks Consensus Estimate of $1.36. However, the bottom line fell 4.9% year over year.
On a GAAP basis, the company reported earnings of $1.17 a share compared with $1.27 recorded in the prior-year period. Total sales of $2,189 million fell 1.4% year over year and missed the consensus estimate of $2,278 million. Excluding the foreign-currency fluctuation impact, total sales dropped 3%. Although overall comps declined in the quarter, several of the company’s divisions comped positive during the reported quarter. Following a low double-digit drop in November, comps were modestly positive in December and January, thus ending the fiscal year on a solid note. Foot Locker's gross-margin rate expanded 160 basis points (bps) to 33.1% owing to solid product demand and reduced promotional activity on fresh inventory. We note that merchandise margin remained flat year over year buoyed by a significant reduction in markdowns, offset by increased freight expense and a rise in penetration of digital sales. In fact, the latter hurt gross margin by roughly 90 bps. However, SG&A expense rate de-levered by 160 bps to 21%. Lower sales coupled with about $4 million of PPE costs and 100 bps of incremental bonus expense in comparison to the last year hurt the metric. The decline was slightly offset by government subsidies of roughly $9 million. Store Update
During the reported quarter, Foot Locker opened 19 outlets, remodeled or relocated 39 stores, and shuttered 53 outlets. As of Jan 30, 2021, the company operated 2,998 stores across 28 countries in North America, Europe, Asia, Australia and New Zealand. Apart from these, there are 127 franchised Foot Locker stores in the Middle East.
Other Financial Details
The company ended fiscal fourth quarter with cash and cash equivalents of $1,680 million, debt of $110 million and shareholders’ equity of $2,776 million. As of Jan 30, 2021, merchandise inventories were $923 million, down 23.6% from the prior-year period. On a constant-currency basis, inventory declined 25.5%. Capital expenditures were $159 million in fiscal 2020.
Moreover, it bought back 660,347 shares worth $27 million during the fourth quarter and 968,547 shares for $37 million in the fiscal year. In fiscal 2020, Foot Locker returned a total of $110 million via share repurchases and dividends. In fact, management hiked quarterly dividend by 33% to 20 cents a share. Additionally, it spent $159 million in relation to store fleet, digital platforms, infrastructure, and supply chain and logistics capabilities. Key Things to Note
The company has been enhancing its omni-channel experience via activating a Shop My Store feature on its website. Management has also extended Apple Pay and Google Pay to the company’s selection of digital payment options. It also activated contactless payment options on handheld POS devices across majority of its outlets. Furthermore, Foot Locker has rolled out a pilot drop-ship program with Nike.
With respect to first-quarter sales, the company is contending with more than 10% of its store base temporarily shut with respect to COVID-19 restrictions. For gross margin in the upcoming quarter, Foot Locker expects less promotional pressure on merchandise margins year over year given the level and relative freshness of the inventory. This forecast does not consider rent abatements. Markedly, higher freight costs are headwind. In relation to SG&A, PPE costs will be incremental in the first quarter as virtually no PPE costs were there last year. How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision.
Currently, Foot Locker has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile 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.
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.