Foot Locker, Inc. (FL - Free Report) has managed to pull off a decent run in the past six months amid the prevailing headwinds in the retail sector. Shares of this company have gained nearly 13% in the past six months, notably outperforming the industry, which grew 9.5%. Also, this Zacks Rank #3 (Hold) stock has comfortably outpaced the broader Retail - Wholesale sector's growth of just 6.2% in the said time period.
Impressive first-quarter results and strong brand portfolio along with operational and financial initiatives bode well for Foot Locker. Let us delve deeper into the factors that are propelling the stock’s performance.
Solid Q1 Results
The company witnessed impressive first-quarter fiscal 2018 results, wherein top and bottom lines surpassed the consensus mark and grew year over year. This also marked its third straight quarter of positive earnings surprise. We also note that the bottom line has improved after declining in the trailing four quarters due to a strong pipeline of new products
As a result of this, management now envisions double-digit percentage growth in annual earnings per share. Comparable-store sales during the second quarter are expected to be flat to up, marginally. During the third and fourth quarter, the metric is projected to increase in low single digit. The company now envisions comparable-store sales to be flat-to-up low single-digit for fiscal 2018 compared with 3.1% decline registered in fiscal 2017.
Brand Strength, a Key Driver
Apart from the stellar show, Foot Locker boasts of a strong portfolio of leading brands under a variety of store banners that helps it to target specific markets and efficiently meet consumer demand. The company is effectively managing inventory, investing in digital platforms, improving supply-chain efficiencies, and reorganizing corporate and division staff. It also entered into a partnership with Nike for a pop-up store called Sneakeasy NYC and made a strategic investment of $15 million in Carbon38. The company's long-term financial goals include attaining sales of $10 billion, sales per gross square foot of $600, operating margin of 12.5%, net income margin of 8.5% and return on invested capital of 17%.
Strategic Initiatives Bode Well
The company is also making efforts to boost its performance by undertaking operational and financial initiatives. These include exploiting opportunities in kids’ and women’s business, shop-in-shop expansion in collaboration with its vendors (such as House of Hoops, PUMA Labs, Jordan Flight 23 shops and The ARMOURY at Champs Sports), exploring store banner.com business, store refurbishment and enhancement of assortments, which is likely to benefit Foot Locker in the long run.
Capital Allocation Plan
Foot Locker revealed a capital expenditure program of $230 million for fiscal 2018 to sustain robust level of investment and enhance shareholder value. The company plans to spend the capital strategically, with primary focus being on developing digital competencies and supply chain. The company’s digital endeavors comprise improvement of mobile and web platforms, implementation of new point-of-sale software worldwide, and expansion of data analytics capabilities. Apart from these, the company plans to spend a major portion of the capital on its fleet of stores to revamp and remodel them.
What Could Limit the Growth?
However, the company is facing headwinds from rising SG&A expenses, which is weighing on the company’s margins. During the first quarter, SG&A expenses grew 50 basis points to 19%, owing to considerable investments in digital operations. Management expects SG&A expenses to increase as a percentage of sales by 110-140 basis points during the second quarter and 100 basis points for the full year. Additionally, the European region witnessed a low-double digit decline in comparable sales during the first quarter of fiscal 2018.
Nonetheless, we believe that Foot Locker’s strategic vendor partnerships will help improve comps performance. Also, measures such as closing of under-performing stores and effective management of inventory will be the focal point going forward.
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