The holiday sales period is critical for any retailer, but the stakes are even higher for Foot Locker (FL -6.17%) as it prepares to announce its fourth-quarter earnings results in a few days. That's because sales growth dove into negative territory in 2017, slumping by 6% in the fiscal second quarter before rebounding slightly to a 4% decline in the following quarter.
Another improvement this week would show that the business has stabilized, and that customer traffic is likely headed back in the right direction. A miss, on the other hand, would point to a painful period of falling profits as Foot Locker works to trim its store footprint in the sluggish U.S. market.
With that bigger picture in mind, let's look at the key trends to watch in the results due out on Friday, March 2.
Foot Locker entered 2017 expecting to produce modest comparable-store sales growth, just as it has in each of the last three fiscal years. That prediction held up even after surprisingly weak first-quarter results sent comps to below 1% from 5% in the prior quarter. At the time, management thought the issue was confined to a delay in income tax refunds. But by the following quarter, it was clear that bigger challenges were impacting the sports apparel and footwear industries. Comps dove 6% in the second quarter even as aggressive price cuts sent gross profit margin down to 30% of sales from 33%.
Management's updated forecast warned that comps might fall by between 3% and 4% for the rest of the year. However, the retailer beat that outlook in the third quarter, and the good news gave investors hope that the holidays might bring modestly negative, or even flat, comps.
Gross profit margin fell in each of the first three quarters of the year, so investors can expect another decline in the holiday quarter. After all, major footwear producers, including Under Armour and Nike (NKE -1.02%), complained about an aggressively promotional selling environment in their fourth-quarter reports.
The good news for Foot Locker here is that Nike has ramped up its product introduction pace to its highest level yet, with dozens of new and upgraded shoes set to hit the market over the next 18 months. Foot Locker cited this increased "availability of premium product" as helping drive traffic to stores in the third quarter while reducing pressure to cut prices. Investors will find out this week whether that positive trend carried over into the holiday season.
Store growth outlook
The weaker demand led management to target closing as many as 150 stores in 2017, up from 116 in the prior year. Foot Locker's sales footprint plans for 2018 will depend on whether the business stabilized over the holiday season. Modestly lower sales, in the context of steady profitability, would support limited shifts as the retailer closes just a few underperforming locations while opening shops in more attractive areas.
If customers didn't respond to the improved inventory, though, Foot Locker would need to consider more aggressive restructuring initiatives that closed many U.S.-based stores in favor of directing resources toward the e-commerce sales channel and those faster-growing international markets. Given the stock's weak performance over the past year, Wall Street is apparently betting on that more pessimistic scenario playing out in 2018.