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Foot Locker (FL) Down 25% in a Month: 3 Reasons to Blame

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A glimpse of Foot Locker, Inc.’s (FL - Free Report) share price movement reveals that it has plunged about 25% in a month wider than the industry’s decline of 11.9%. Additionally, a downtrend in the Zacks Consensus Estimate also echoes the same sentiment. So what is behind the debacle? We have tried to ascertain major reasons that can be held responsible for this Zacks Rank #5 (Sell) stock’s dismal show in the bourses.

Shares of Foot Locker crashed on Aug 18 following the company’s disappointing performance in the second quarter of fiscal 2017. The stock plunged almost 28% on the respective day after it succumbed to a negative earnings surprise of 31.1% in the quarter, with the top line continuing to struggle. As a result, analysts polled by Zacks tweaked their estimates.

We note that the Zacks Consensus Estimate of $3.95 and $3.75 for fiscal 2017 and 2018 has declined by 22.5% and 30.7%, respectively, in the past 30 days. Moreover, the same has plunged 34.4% to 80 cents for the third quarter.

3 Reasons Behind the Debacle

Second Straight Earnings Miss

Foot Locker, the athletic shoes and apparel retailer, continued with dismal performance in fiscal 2017 posting second straight quarter of earnings miss in the recently concluded quarter. The company delivered second-quarter earnings of 62 cents a share that fell short of the Zacks Consensus Estimate of 90 cents and plummeted 34% year over year after declining 2.2% in the preceding quarter. The results in the quarter were impacted by soft performance of “some recent top styles” and lack of innovative fresh products in the market. Challenging retail landscape and changing consumer spending pattern are making operating environment tough.

Sales & Comps Continues to Struggle

After registering a meager growth of 0.7% in the first quarter of fiscal 2017, total sales declined 4.4% during the second quarter. Meanwhile, comparable-store sales fell 6% during the second quarter, following an increase of 0.5% in the preceding quarter. These numbers are in sharp contrast to the company’s performance in fiscal 2016. During the first, second, third and fourth quarters of last fiscal total sales increased 3.7%, 5%, 5.1% and 5.3%, respectively. Maintaining the same chronological order comparable-store sales rose 2.9%, 4.7%, 4.7% and 5%, respectively.

Tepid View

Management now anticipates comparable sales to decline in the range of 3-4% in remaining part of fiscal 2017. Foot Locker now expects adjusted earnings per share to decline in the band of 20-30% (excluding a benefit of 12 cents from 53rd week) during the second half of 2017. Management now envisions gross margin to contract in the range of 230-250 basis points in the third quarter and between 150 and 170 basis points in the final quarter on a 13-week basis. SG&A as a percentage of sales is likely to be up 70-100 basis points in both the third and fourth quarters.

Bottom Line

The sporting goods industry seems to be in doldrums, as customers are jumping on the dot-com bandwagon, leaving lesser options for brick-and-mortar retailers. Consequently, the sporting goods space has grown extremely competitive and promotional, thus creating pressure on margins and bottom line. While most retailers are trying all means to enhance omni-channel capabilities, competition from online giant Inc. (AMZN - Free Report) still remains a major threat. Well, this has been a major concern for big-wigs.

DICK’s Sporting Goods Inc. (DKS - Free Report) and The Finish Line, Inc. are particularly troubled by the fact that some of their most significant vendors like NIKE, Adidas and Under Armour have resorted to considerable direct-to-consumer selling. To top it, the swoosh brand’s plans to sell directly on Amazon raises further concerns for the sporting goods retailers.

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

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