In this segment from Motley Fool Money, host Chris Hill and analysts David Kretzmann, Jason Moser, and Aaron Bush break down the latest earnings report from sneaker specialist Foot Locker (FL 0.41%), which was not strong, but also not as bad as Wall Street had expected. Despite falling comps and a shrinking store count, the stock price jumped by around 15% in response to the release. The guys talk about Foot Locker's path ahead, whether its outlook is too optimistic, the challenges of e-commerce, and a bigger threat to its sustainability than Amazon (AMZN -1.82%).
A full transcript follows the video.
This video was recorded on May 25, 2018.
Chris Hill: Foot Locker's same-store sales fell nearly 3% in the first quarter, and Wall Street stood up and cheered. Shares of Foot Locker up 15% on Friday. Alright, David, the comps weren't good, but there have to have been some bright spots in this quarter.
David Kretzmann: Low expectations are a beautiful thing, Chris. Foot Locker had guided for weak first quarter results, but they continue to expect those comps to become flat and eventually positive through the remainder of the year. You have to give the company credit. They have nearly 3,400 stores worldwide. Most of those are company-owned. But the balance sheet is still strong, $900 million in net cash, producing about $600 million in free cash flow a year. So, they have some flexibility to reinvest in the stores, try to bring more experiences to those retail stores, invest in digital, try to make sure they're bringing in the latest and greatest sneaker trends and apparel trends. I think a lot of people assume that Amazon would eat Foot Locker's lunch, Zappos would eat their lunch. But so far, the company has been resilient, and it looks like it'll improve the rest of the year.
Aaron Bush: In my opinion, this was not a great quarter, at all. I don't think closing stores and falling foot traffic make for much excitement. I mean, they can say they'll do better, but in my opinion, they sort of have to prove it before I get excited. I agree that they might become more Amazon-proof than others think, but I think their largest threat isn't Amazon, it's Nike (NKE -2.04%), it's Adidas, it's them going more direct-to-consumer and really accelerating that effort. The more Foot Locker and stores like Foot Locker continue to suffer, the more it just motivates those big brands to push even harder to get those customer relationships directly.
Hill: Am I the only one who actually likes to buy footwear in person? In all honesty, that's one of the mental leaps I'm trying to make here. I buy a few pair of sneakers every year. I'm never buying them online.
Bush: I haven't bought shoes in stores in probably six or seven years.
Jason Moser: I was going to say, man, once you stop growing, you know what your size is. I don't understand what your hang-up is, Chris.
Kretzmann: Maybe Chris is still growing.
Moser: Zappos for the win, right?
Hill: I'm trying out different brands, all that sort of thing.
Kretzmann: And I don't know how much experience you can really bring to buying shoes. At the end of the day, you're still going into the store to buy shoes. I think their focus has been really trying to be at the forefront of any new and emerging trends within the shoe category. Maybe that helps attract people into the stores. But I think they do have an uphill battle compared to some other concepts, when it comes to creating compelling experiences.
Hill: Let me go back to Nike for a second, Aaron. When Sports Authority went under, one of the things we saw that was, Nike was on the hook for a lot of inventory. I mean, it's a little bit of a balancing act that Nike and Adidas and Under Armour have to pull off here. They're, in some ways, rooting for Foot Locker to do well, until that tipping point where they really get their e-commerce operations going.
Bush: Yeah. At the end of the day, they just want to sell shoes. And it's more, wherever the consumers are going to go to buy those shoes is where those companies need to be. So, it's just playing that dance of where the customer is going. Are they going to stores less? Are they going online more? Therefore, how do you position your business for that?
Moser: Yeah. I think Foot Locker is certainly pulling for Nike to do well. Nike was mentioned 17 times in this earnings call, so they're obviously hoping that Nike sticks around. I think you're probably looking at a situation where Foot Locker needs Nike more than the other way around, and that goes back to your point about that direct-to-consumer model. Nike and Under Armour and even Adidas are growing out those capabilities.