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Foot Locker Declines 12% in 3 Months: Can the Stock Rebound?

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Foot Locker, Inc.’s FL shares have declined 11.5% in the past three months, thanks to multiple headwinds surrounding the stock. The stock was affected by management’s soft view for the fourth quarter of fiscal 2019, issued during fiscal third-quarter earnings call. Also, the quarter marked its third consecutive sales miss. We note that the industry rallied 9% in the same time frame.

Management projected fourth-quarter comparable-store sales (comps) to be relatively flat, which indicates soft trends in its apparel business and the challenging comparison to year-ago quarter’s 9.7% increase. Moreover, fourth-quarter gross margin is likely to witness contraction of 10-30 basis points (bps) and SG&A rate is expected to be flat to up 10 bps. For fiscal 2019, comps are expected to come in the low single-digit range. Further, SG&A rate is projected to be up 40-50 bps.

In fact, the company has been witnessing higher SG&A costs for a while. These expenses are expected to put pressure on margins and overall profits. Again, stiff competition from direct-to-consumer channels of other renowned footwear makers and sluggish mall traffic are deterrents. Also, foreign currency translation risks cannot be ignored.

Can Foot Locker Bounce Back?

While the aforementioned factors make us apprehensive, Foot Locker is undertaking operational and financial initiatives to lift performance. The company is focused on managing inventory, investing in digital platforms and improving supply chain efficiencies. International expansion is another growth catalyst. Foot Locker is also striving to augment direct-to-consumer operations, tap underpenetrated markets and open Power Stores.

Moreover, the company is likely to benefit from its partnership with Nike highlighting pop-up store called Sneakeasy NY. Also, strategic investment in Carbon38 that owns and operates an e-commerce destination for active as well as performance wear for women bodes well. The company also invested $3 million in NTWRK — a leading youth culture e-commerce and content platform. These investments enable the company to expand products and brands, access new business segments as well as leverage innovative technologies.

Management believes that the company is likely to benefit in the long run through benefits from shop-in-shop expansion in collaboration with vendors, store business, store refurbishment and enhancement of assortments.

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Chico's FAS, Inc. CHS has an impressive long-term expected earnings growth rate of 15% and presently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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