Back to top

Image: Bigstock

Foot Locker's (FL) Shares Down 30% Despite Q4 Earnings Beat

Read MoreHide Full Article

Shares of Foot Locker, Inc. (FL - Free Report) tumbled 29.8% during the trading hours on Feb 25, despite posting sturdy fourth-quarter fiscal 2021 results. Both the top and the bottom line increased year over year and surpassed the respective Zacks Consensus Estimate. FL delivered the seventh straight earnings beat and the fourth consecutive sales surprise in the reported quarter.

Starting the fourth quarter of fiscal 2022, Foot Locker does not anticipate any vendor to represent above 55% of the overall supplier expenditure. This is lower than 65% seen in the year-earlier quarter. This change reflects Nike's strategic shift to direct-to-consumer and Foot Locker's continuous brand and category diversification initiatives. This coupled with a soft view for fiscal 2022 most probably weighed on investors’ sentiments.

Over the past six months, shares of Foot Locker have declined 17.8% compared with the industry’s 9.8% decrease.

Q4 Metrics

The athletic shoes and apparel retailer posted adjusted earnings of $1.67 per share, which surpassed the Zacks Consensus Estimate of $1.43. The bottom line increased 7.7% from adjusted earnings of $1.55 per share recorded in the prior-year quarter.

Total sales of $2,341 million rose 6.9% year over year and came ahead of the consensus estimate of $2,314 million. Excluding the foreign-currency fluctuation impact, total sales grew 8.2%. Digital penetration was 21.6% compared with 27.4% in fiscal 2020 and 18.7% in fiscal 2019.

Comparable store sales (comps) moved up 0.8% in the quarter, with apparel majorly outpacing footwear. The metric in its stores rose 8.8% with store traffic up nearly 25%, while conversion decreased in high teens. North American comps decreased 4.5% while EMEA comps rose high teens and APAC comps increased above 20% with a solid performance across the Pacific and Asia regions.

During the reported quarter, 97% of Foot Locker’s global store fleet was open compared to 87% last fiscal year.

An Insight Into Margins

Foot Locker's gross-margin rate in the reported quarter dropped 10 basis points (bps) from the prior-year quarter’s tally. Solid merchandise margin gains, offset by occupancy deleverage, mainly reflected higher rent abatements in the year-ago period.

The SG&A rate was 22.4%, deleveraging approximately 140 bps due to increased labor costs, marketing and technology spend.

Store Update

During the fiscal fourth quarter, Foot Locker opened 60 stores, acquired 38 atmos stores and remodeled or relocated 115 outlets. FL closed 76 stores and 120 Footaction of which 45 stores were converted to other banners.

As of Jan 29, 2022, Foot Locker operated 2,956 stores across 27 countries in North America, Europe, Asia, Australia and New Zealand.  Also, FL had 142 franchised stores operating in the Middle East and Asia.

Following the success of its first 50 global community and power stores, management plans to expand to roughly 300 locations in the next three years. For fiscal 2022, management expects opening roughly 100 stores, including 40 community and power outlets, 27 WSS stores and nine atmos stores while shutting down nearly 190 stores.

Other Financial Details

This currently Zacks Rank #3 (Hold) player ended the fiscal fourth quarter with cash and cash equivalents of $804 million. Long-term debt and obligations under finance leases amounted to $451 million and shareholders’ equity summed $3,243 million. As of Jan 29, 2022, merchandise inventories were $1,266 million, up 37.2% from the year-earlier quarter’s end-level.

During the quarter, Foot Locker repurchased 4 million shares for $178 million. FL also paid out a quarterly dividend of 30 cents per share or a total cash payout of $29 million. Foot Locker invested $325 million in acquiring atmos and paid down debt of $98 million.

For fiscal 2022, Foot Locker’s board approved a $275-million capital expenditure program. FL also announced a quarterly cash dividend of 40 cents per share, indicating a 33% hike from the prior dividend payout. This will be payable Apr 29, 2022, to its shareholders of record as of Apr 14. The board authorized a new share repurchase program to buy back up to $1.2 billion of the outstanding common stock.

Long-Term Plan

Foot Locker is focused on boosting customer experience, investing in long-term growth and driving productivity. In this regard, management will accelerate efforts, including greater diversification of merchandise and vendor mix, acceleration of the shift to off-mall and rollout of the important growth banners, advancement of omni-channel endeavors and implementation of the cost-savings program.

As part of Foot Locker’s investment in GOAT Group, both companies are in active discussions to design programs with a target set to boost the value proposition and consumer experience. In addition, management expects WSS to hit $1-billion annual sales by 2024, backed by higher store openings and same-store sales growth. Also, FL anticipates atmos’ annual sales to grow 50% to roughly $300 million in the next three years by scaling up the same in the existing markets and enhancing the same internationally.

Outlook

Management exited fiscal 2021 on a solid note reflecting momentum in the business. Going into fiscal 2022, Foot Locker continues to gain from substantial flexibility in its real estate portfolio, store footprints and optimization of its omni-channel offerings. For the full fiscal, management expects a sales decline of 4-6% and a comparable sales decrease of 8-10%.

Gross margin is anticipated in the range of 30.1-30.3% and the SG&A rate is forecast to be 20.2-20.4%. Driven by occupancy deleverage and elevated supply-chain costs, the gross margin is likely to decrease 410-430 bps. SG&A is anticipated to leverage 30-50 bps in fiscal 2022.

Foot Locker envisions adjusted earnings per share of $4.25-$4.60 for the fiscal year. The Zacks Consensus Estimate for fiscal 2022 earnings is currently pegged at $6.13, which is likely to witness downward revisions in the coming days.

3 Hot Stocks to Consider

Here are three better-ranked stocks, namely Capri Holdings (CPRI - Free Report) , DICK'S Sporting Goods (DKS - Free Report) and Dollar Tree (DLTR - Free Report) .

Capri Holdings, a global fashion luxury group, currently flaunts a Zacks Rank #1 (Strong Buy). CPRI’s bottom line outperformed the Zacks Consensus Estimate by a wide margin in the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Capri Holdings’ current financial year sales and EPS suggests growth of 37.1% and 215.8%, respectively, from the corresponding year-ago period’s reported figures. CPRI has an expected EPS growth rate of 30.9% for three-five years.

DICK'S Sporting Goods, which operates as a sporting goods retailer, has a Zacks Rank #2 (Buy) at present. DKS has a trailing four-quarter earnings surprise of 104.2%, on average.

The Zacks Consensus Estimate for DICK'S Sporting Goods’ current financial year sales and EPS suggests growth of 27.6% and 151.6%, respectively, from the corresponding year-ago period’s reported numbers. DKS has an expected EPS growth rate of 11.7% for three-five years.

Dollar Tree, the operator of discount variety retail stores, holds a Zacks Rank of 2 at present. DLTR has a trailing four-quarter earnings surprise of 8.8%, on average. DLTR has an expected EPS growth rate of 12.2% for three to five years.

The Zacks Consensus Estimate for DLTR’s current financial-year sales suggests growth of 3.4% from the year-ago period’s reported figure.