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Foot Locker's Past 3 Months Performance Dismal: Here's Why

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Of late, Foot Locker, Inc. FL has been struggling on the bourses, due to its soft view for the Christmas quarter. Shares of this New York-based company have increased 0.3% in the past three months, underperforming the industry’s growth of 7.8%.

Moreover, unimpressive estimate revision trend for the current quarter and fiscal 2019 buoy pessimism. Over the past 30 days, the Zacks Consensus Estimate has moved down by 3 cents and 4 cents to $1.62 and $4.90, respectively.

We note that the stock came under pressure in spite of this sporting-goods retailer reporting a positive earnings surprise in the third quarter of fiscal 2019. The company’s total sales fell short of the Zacks Consensus Estimate for the third quarter in a row. Also, management’s projection of flat comparable store sales and 10-30 basis points contraction in gross margin for the holiday-season quarter were not well perceived by investors.

Notably, concerns related to stiff competition from direct-to-consumer channels of other renowned footwear makers, tariff imposition due to the U.S.-China trade war and sluggish mall traffic cannot be ignored. SG&A costs have been rising for a while due to sustained investments in augmenting digital capabilities and higher incentive compensation cost. This may keep margins under pressure. For fiscal 2019, SG&A rate is projected to be up 40-50 basis points.

Revival Strategies

Foot Locker is trying to improve its performance through its operational and financial initiatives. The company is investing in digital platforms and improving supply chain efficiencies. International expansion, especially in Europe, is another growth catalyst. It is also focusing on augmenting direct-to-consumer operations, tapping underpenetrated markets and opening of Power Stores.

This Zacks Rank #3 (Hold) company entered into a partnership with Nike for a pop-up store called Sneakeasy NYC and made an investment of $15 million in Carbon38, which owns and operates an e-commerce destination for active and performance wear for women. The company also acquired a minority interest in Goat, a managed marketplace for authentic sneakers, by making an investment of $100 million.

Foot Locker invested $3 million in Super Heroic, a kid’s footwear brand and $12.5 million in “Rockets of Awesome”, a children's apparel company. It also made an investment of $3 million in NTWRK, a leading youth culture e-commerce and content platform. These investments are expected to widen the company’s scope to expand products and brands, access new business segments and take advantage of innovative technologies.

We believe that strategic endeavors along with planned investments may help the company attain long-term goal.

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