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Foot Locker (FL) Down 9.2% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Foot Locker (FL - Free Report) . Shares have lost about 9.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Foot Locker due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Foot Locker Q2 Earnings & Sales Beat Estimates, Up Y/Y

Foot Locker, Inc. continued with its positive earnings surprise streak for the fourth straight quarter, when it reported second-quarter fiscal 2018 results. This operator of athletic shoes and apparel retailer posted quarterly earnings of 75 cents a share that beat the Zacks Consensus Estimate of 70 cents and surged 21% from the year-ago period.

The New York-based retailer generated total sales of $1,782 million that not only increased 4.8% year over year but also came ahead of the Zacks Consensus Estimate of $1,764 million, marking the second successive quarter of beat. Excluding the effect of foreign currency fluctuations, total sales rose 3.9%.  

Meanwhile, comparable-store sales (comps) inched up 0.5% during the quarter under review. Although, comps improved marginally, it fared much better than the decline of 2.8% witnessed in the preceding quarter.

Footwear witnessed marginal decline in comps, while apparel was up double digits, its eighth successive quarter of comps growth. Comps at accessories were down double digits, as sturdy demand for bags was offset by sales declines in hats and socks.

Comparable sales at stores declined 0.8%, while at direct-to-customer channel the metric improved 9.3%. As a percentage of total sales, DTC was 13.5% during the quarter, up from 12.7% from the year-ago period. Overall, store traffic fell in low single digits for the quarter, with traffic at U.S. banners remaining flat and at international banners down in high single digits.

Gross margin increased 60 basis points to 30.2% during the quarter, reflecting 30 basis points expansion in merchandise margin rate and 30 basis points of leverage in occupancy and buyers’ compensation.

SG&A expense rate increased 140 basis points to 21.3% on account of sustained investments in augmenting digital capabilities, wage pressure as well as higher incentive compensation expense.

Store Update

During the quarter under review, Foot Locker opened 13 new outlets, remodeled or relocated 33 outlets, and shuttered 21 outlets. As of Aug 4, 2018, the company operated 3,276 outlets across 24 countries in North America, Australia, New Zealand and Europe. Apart from these, there are 107 franchised Foot Locker stores in the Middle East. Germany has 10 franchised Runners Point stores.

During fiscal 2018, the company plans to open 45 new outlets including expansion into Malaysia, Hong Kong and Singapore and still expects to shutter about 120 stores.

Other Financial Details

Foot Locker ended the quarter with cash and cash equivalents of $950 million, long-term debt of $124 million, and shareholders’ equity of $2,482 million. During the quarter, the company repurchased 1.8 million shares of worth $93 million and paid a quarterly dividend of $40 million. The company made a capital investment of $54 million during the quarter under review and is on track to spend $230 million in fiscal 2018.

Outlook

Comparable-store sales during the third quarter are expected to be up in low single digits. For fiscal 2018, management envisions the metric to be up in low single digit. Further, management anticipates double-digit increase in earnings per share for the fiscal year.

Gross margin is likely to improve 10-40 basis points during the third quarter and 10-30 basis points in fiscal 2018.

SG&A expense is expected to increase as a percentage of sales by 140-160 basis points during the third quarter and 100-110 basis points for the full year. The increase is due to higher digital investments.


 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5.67% due to these changes.

VGM Scores

At this time, Foot Locker has a nice Growth Score of B, 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 quintile for this investment strategy.

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