Foot Locker (NYSE:FL) investors have been enduring significant volatility in 2018 as the company posts declining sales and falling profit margins. Yet the shoe retailer's last few quarterly reports contained encouraging signs that this slump is only temporary. The company took some tough steps toward improving its inventory position while promising that the price cuts will eventually stabilize and pave the way for stronger earnings.

Those moves paid off in the quarter that just closed, and the company returned to modest sales growth at its existing locations. Profitability trends, meanwhile, turned positive thanks to a flood of new product styles. Let's take a closer look at the fiscal second-quarter results:

 Metric

Q2 2018

Q2 2017

Growth (YOY)

Revenue

$1.8 billion

$1.7 billion

5%

Net income

$88 million

$51 million

73%

Earnings per share

$0.75

$0.39

92%

Data source: Foot Locker's financial filings. YOY = year over year.

What happened with Foot Locker this quarter?

Sales trends improved for the second straight quarter and returned to positive territory thanks to an influx of fresh footwear and apparel products, especially from Nike. Foot Locker's profitability rose for the first time in over a year, too, as a direct result of its stronger inventory posture.

A jogger laces up.

Image source: Getty Images.

A few key highlights of the quarter:

  • Comparable-store sales inched higher by 0.5% compared to a 3% decline last quarter and a 4% slump during the 2017 holiday shopping season. Foreign currency swings pushed its overall revenue improvement to just under 5%.
  • Gross profit margin rose to 30.2% of sales from 29.6% a year ago.
  • Selling expenses jumped to 21.3% of sales from 19.9%, and that move offset all of the gains from Foot Locker's rising gross margin to keep operating income steady year over year.
  • Net income improved mainly due to the absence of a charge that lowered the prior year's profits. After adjusting for one-time charges and benefits, adjusted earnings rose 21%.
  • Inventory levels continued to drop, falling 2% despite the uptick in sales.

What management had to say

Executives said the operating trends broadly followed their recovery plans. "We are encouraged by the results we delivered," CFO Lauren Peters said in a press release, "including a return to growth on the top line combined with gross margin expansion."

"Our performance reflects the work we are doing in several fronts," CEO Richard Johnson added. These initiatives include a more substantial e-commerce presence and an intense focus on only the newest, freshest footwear products. The moves "position the company to succeed in a rapidly evolving retail environment," Johnson said.

Looking forward

Johnson and his team have been predicting a steady improvement in operating trends through fiscal 2018, and these results add support to that bullish forecast. In fact, Foot Locker is running slightly ahead of its recovery targets now that sales already returned to positive territory. Management had predicted in late May that this wouldn't happen until the third quarter.

Meanwhile, two other metrics suggest the retailer is poised to build on its positive momentum over the next few quarters. Gross profit margin is rising, for one, and inventory levels are falling. These trends put Foot Locker in a strong position to sell a high proportion of the new, high-margin products that will be introduced by Nike and other suppliers in advance of the holiday months.

Demitrios Kalogeropoulos owns shares of NKE. The Motley Fool recommends NKE. The Motley Fool has a disclosure policy.