It's been a tough year for athletic footwear retailer Foot Locker (FL 0.23%) and, by extension, its shareholders. The stock tumbled in a big way following May's release of its first-quarter numbers and lackluster guidance.
Then it fell again this past week in response to the company's disappointing second-quarter results; the 10% year-over-year decline in sales dragged per-share profits down from $1.10 in the second quarter of last year to only $0.04 this time around.
All told, Foot Locker shares are down more than 60% from their February peak thanks to economic lethargy and the subsequent drying up of demand for expensive sneakers.
As the old adage goes, though, it's always darkest before dawn. Here are three bullish arguments for Foot Locker that stand out right now.
1. Strong economies drive discretionary purchases
It wasn't just last quarter's headwind that upended the stock. Consumers are feeling the pain of prolonged inflation, and that doesn't look or feel like it's going to end anytime soon. As CEO Mary Dillon explained of Foot Locker's second-quarter results, "We did see a softening in trends in July and are adjusting our 2023 outlook to allow us to best compete for price-sensitive consumers."
The updated full-year guidance in question calls for a same-store sales decline of somewhere between 8% and 9% versus the company's previous expectation for a year-over-year dip of between 6.5% and 8%. What was once a suggested 2023 profit of between $2.00 and $2.25 per share has been dialed back to a range of $1.30 to $1.50.
Image source: Getty Images.
Economic headwinds are cyclical, though, whether or not they correspond with official recessions. This one will end sooner or later and may well end sooner than most investors believe. Bank of America and JPMorgan Chase both indicated earlier this month that the U.S. economy probably won't slip into a recession after all, while JPMorgan raised its third-quarter GDP growth outlook from a paltry 0.5% to 2.5%.
Such a reacceleration of economic growth is likely to inspire bullishness, which, in turn, inspires the sort of consumer confidence that drives discretionary spending on things like sneakers -- discretionary spending that isn't happening in earnest now.
2. Foot Locker is in the midst of overhauling itself
In retrospect, the athletic footwear and apparel retailer should have been rethinking every aspect of its business long before the COVID-19 pandemic rattled it. Too many malls are still fighting just to survive, and most Foot Locker stores are found at malls. Neighborhood-oriented strip malls are many consumers' go-to shopping destination, where Foot Locker doesn't have much of a presence. Then there's the fact that the Foot Locker brand name itself just isn't a great draw in some markets.
Most of these challenges, however, are actually being addressed now. It's called "Lace Up" -- a revitalization strategy unveiled in March calling for (among other things) the closure of 400 underperforming mall-based stores, including the shuttering of 125 Champs locales. The retailer's not simply abandoning a big chunk of its 2600-store footprint, though. It intends to open between 300 and 400 new locations under more marketable banners like Foot Locker Kids, an experiential concept it calls House of Play, and a brand called WSS that aims to serve Hispanic consumers.
Separately but simultaneously, Mary Dillon has restored a once-strong relationship with footwear and athletic apparel powerhouse Nike. The brand accounts for more than two-thirds of Foot Locker's revenue.
None of these efforts have had a chance to produce a meaningful, tangible fiscal benefit yet -- but stay tuned.
3. The stock's down -- a lot
The third and final reason to step into Foot Locker stock now is the sheer scope of its sell-off. Not only are the shares down more than 60% just since February, but they are trading more than 70% off from their 2022 peak and nearly 80% from the record high reached in 2017. The stock's also just coming off of a multi-year low.
All of this weakness leaves Foot Locker shares remarkably ripe for a big bounce in the event of a bull market, which tends to lift all stocks. And it's not as if such a rebound isn't merited despite the company's current turbulence.
Although analysts agree that revenue is apt to fall on the order of 8% this year and drag profits down with them, progress should become evident again as soon as next year. Modest sales growth in 2024 is expected to push this year's expected per-share earnings of $1.75 up to $2.65, with the retailer starting to realize the benefits of closing underperforming stores and opening more relevant ones in smarter locations.
The analyst community then expects both sales and profit growth to accelerate even more thereafter. In the meantime, Foot Locker shares are dirt cheap, priced at less than 7 times next year's earnings estimates.
Data source: Stockanalysis.com. Chart by author.
Sure, the recent decision to suspend its dividend payments undermines the overall bullish case here. Its dividend isn't the primary or even a secondary reason to own Foot Locker shares at this time, though. This is a value-minded turnaround story -- one with above-average risk but above-average potential upside to match it.
Remember, you buy stocks for where their underlying companies could go and not for where they've been.
