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Foot Locker (FL) Down 3.7% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Foot Locker (FL - Free Report) . Shares have lost about 3.7% 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 its most recent earnings report in order to get a better handle on the important catalysts.

Foot Locker Earnings Beat Estimates in Q3, Increase Y/Y

After reporting in-line earnings in the second quarter of fiscal 2019, Foot Locker, Inc. reported a positive earnings surprise in the third quarter. However, total sales fell short of the Zacks Consensus Estimate for the third quarter in a row. Nonetheless, both the top and the bottom line increased year over year. Also, the rate of growth of comparable-store sales accelerated sharply on a sequential basis. Again, gross margin improved following a contraction in the preceding quarter.

This operator of athletic shoes and apparel retailer posted adjusted earnings of $1.13 per share that came ahead of the consensus mark of $1.07. The quarterly earnings surged 18.9% from the prior-year period reported figure of 95 cents. This can be attributed to higher sales as well as increased share repurchase activity.

Total sales of $1,932 million rose 3.9% year over year but came below the consensus estimate of $1,940 million. Excluding the effect of foreign currency fluctuations, total sales grew 5.1%. Meanwhile, comparable-store sales rose 5.7% during the quarter under review, following an increase of 0.8% in the preceding quarter.

Comparable sales increased 4.7% at its stores, while direct to customer (DTC) channel sales increased 11.4%. DTC business increased to 15.3% of total sales during the quarter, up from 14.5% in the year-ago period.

Foot Locker's gross margin rate expanded 50 basis points to 32.1% during the quarter. We note that SG&A expense rate declined 10 basis points to 21.3%. Management had earlier projected gross margin expansion of 10-30 basis points and SG&A expense rate contraction of 10-30 basis points for the third quarter.

Store Update

During the quarter, Foot Locker opened 11 new outlets (three Power Stores and two new doors in Asia), remodeled or relocated 34 stores, and shuttered 25. As of Nov 2, 2019, the company operated 3,160 outlets across 27 countries in North America, Europe, Asia, Australia and New Zealand. Apart from these, there are 128 franchised Foot Locker stores in the Middle East. Germany has 10 franchised Runners Point stores. During fiscal 2019, the company expects to open about 70 stores, remodel or relocate 165 and close 180.

Other Financial Details

Foot Locker ended the quarter with cash and cash equivalents of $744 million, long-term debt of $122 million, and shareholders’ equity of $2,427 million. During the quarter, the company repurchased 4.6 million shares for $178 million. Management incurred capital expenditure of $45 million during the quarter. Foot Locker plans to make capital expenditures of $220 million during fiscal 2019.

Guidance

Management expects fourth quarter comp to be relatively flat, which reflects the trends in apparel business as well as the challenging comparison to last year's 9.7% increase. The company expects gross margin contraction of 10-30 basis points and SG&A rate to be flat to up 10 basis points. The company envisions mid-to-high single-digit growth in earnings per share.

For fiscal 2019, Foot Locker expects comps to be in the low single-digit range. It anticipates, gross margin improvement of 10-20 basis points. Again, SG&A rate is projected to be up 40-50 basis points. The company estimates a mid-single-digit growth in earnings per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, Foot Locker has an average Growth Score of C, 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 20% 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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