Please ensure Javascript is enabled for purposes of website accessibility

Foot Locker Earnings: What to Watch

By Demitri Kalogeropoulos - Feb 25, 2018 at 2:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investors have big questions about the retailer's growth potential heading into next week's report.

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.

Shoes for sale.

Image source: Getty Images.

Sales trends

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.

Profitability

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.

FL Gross Profit Margin (TTM) Chart

FL Gross Profit Margin (TTM) data by YCharts.

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Foot Locker, Inc. Stock Quote
Foot Locker, Inc.
FL
$25.25 (-6.17%) $-1.66
NIKE, Inc. Stock Quote
NIKE, Inc.
NKE
$102.20 (-1.02%) $-1.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
317%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.