What happened

Shares of Foot Locker, Inc. (NYSE:FL) were selling off today after the company said comparable sales declined in the fourth quarter, and offered a weak outlook for 2018. As a result, the stock was down 15.3% as of 10:57 a.m. EST.

A Foot Locker House of Hoops store

Image source: Foot Locker.

So what 

Comparable sales in the quarter fell 3.7%, reflecting broader weakness in the domestic sneaker and sportswear segment. Total revenue for the quarter, which included an extra week, increased 4.6% to $2.21 billion, which was slightly short of estimates at $2.22 billion. Adjusted for currency exchange, sales would have increased just 2%. Gross margin sank 230 basis points to 31.4%, which management blamed on a "highly promotional market place environment," and selling, general, and administrative costs increased 40 basis points.  Adjusting earnings per share (EPS) fell from $1.37 to $1.26, which beat estimates by a penny, but without the extra week in the calendar, EPS would have dropped to $1.14.

CEO Richard Johnson said, "The dramatic shifts influencing the expectations and behaviors of our customers continued to affect our business in the fourth quarter... That said, we remained a highly profitable company in 2017, even though our sales and profit results were not what we planned for going into the year."  

Now what 

Foot Locker's outlook for the year was decent as the company saw flat to low-single-digit comparable sales, an improving gross margin, and a 100 basis-point increase in SG&A costs. On the bottom line, management projected a double-digit increase in earnings per share due in part to a lower tax rate and fewer shares outstanding. However, CFO Lauren Peters said sales and margin trends were likely to continue into the first quarter of the current year, adding to investor nervousness.

As the sportswear landscape evolves, suppliers like Nike and Under Armour are increasingly betting on their own direct-to-consumer channels, which could present long-term challenges for Foot Locker. Still, the stock is cheap, and if management can deliver positive comparable sales and earnings-per-share growth this year, as it projected, the stock should rebound.