What happened

Shares of footwear retailer Foot Locker (NYSE:FL) soared on Friday following a third-quarter report that wasn't as bad as feared. While comparable sales slumped, the company beat expectations and said it may beat its previous holiday quarter guidance. Foot Locker also announced an expanded partnership with Nike, news that could be contributing to the gains. The stock was up about 25% at 12:50 p.m. EST.

So what

Foot Locker reported third-quarter revenue of $1.87 billion, down 0.8% year over year but $40 million higher than the average analyst estimate. Excluding currency effects, revenue would have slumped by 2.3%. Comparable store sales fell 3.7%, with the company pointing to a highly promotional environment as one factor driving down sales.

A display in a Foot Locker store.

Image source: Foot Locker.

Non-GAAP earnings per share (EPS) came in at $0.87, down from $1.13 in the prior-year period but $0.07 higher than analysts were expecting. Foot Locker has seen an improvement in the availability of premium products during the second half, which contributed to its better-than-expected bottom line. Gross margin still tumbled 2.9 percentage points year over year to 31%.

Foot Locker now believes that it could modestly exceed its previous guidance for fourth-quarter sales and earnings. Foot Locker said in August that it expected a comparable store sales decline between 3% and 4% during the fourth quarter, along with a non-GAAP EPS decline between 20% and 30% in the second half.

Now what

Foot Locker's third-quarter results weren't good on an absolute basis, but the market was expecting worse. On top of the revenue and earnings beats, Foot Locker announced a deal with Nike that will create in-store displays and pop-up stores. This expanded partnership may be giving investors some confidence that Foot Locker's role as a key Nike partner will remain intact.

Following this holiday season, which will almost certainly feature a big drop in earnings, Foot Locker will need to stabilize its business in 2018. A failure to do so will likely erase Friday's impressive gains.

Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.