Sometimes simply meeting expectations isn't enough for Wall Street. Foot Locker (FL -4.11%) shareholders experienced this firsthand after the company's stock dropped despite the retailer announcing a return to sales growth and improving profitability.
Footlocker had plenty of encouraging news to share with investors. Executives have confidence that its operating momentum will continue to build over the next few quarters, even as expenses rise thanks to increased spending on the digital sales channel.
Let's take a closer look at the key points management wanted to get across to investors in its latest earnings call.
Image source: Getty Images.
A good start
Foot Locker managed a less-than-1% uptick in comparable-store sales to mark a solid improvement over the 3% to 4% declines it had seen in the prior two quarters. Just as management had predicted, that growth was supported by a surge of innovative product releases from key suppliers, including Nike. Foot Locker CFO Lauren Peters commented on the improved performance, saying, "We are encouraged by this positive inflection in [comparable-store] sales, expansion in our gross margin rate and an improving assortment of fresh and exciting products given that, it all starts with the top line."
Foot Locker's performance carried through to the bottom line, as suppliers' new product releases combined with improving inventory management allowed the company to lessen its reliance on price cuts. As a result, gross profit margin ticked up for the first time in over a year.
FL Gross Profit Margin (TTM) data by YCharts.
Good news and bad news
Overall store traffic was down low single digits for the quarter, with traffic at our U.S. [locations] essentially flat and down high single digits at our international [stores].
-- CFO Lauren Peters
Although the company's performance is encouraging, Footlocker has plenty of work to do before it can claim a robust rebound. Customer traffic fell hard at its struggling European locations, for example, and was flat in the core U.S. business. Footlocker's minor increase in overall revenue was only possible thanks to healthy digital sales, as the e-commerce channel shot up to 13.5% of the business from 12.7% a year ago.
Spending more on digital
[D]uring the quarter we completed further upgrades of our digital sites to our new, more responsive platform. As we move through 2018, we will continue to roll out the upgrade across all our banners with greater functionality added over time.
-- CEO Richard Johnson
Foot Locker is putting lots of effort -- and resources -- behind its digital infrastructure push. These moves are supporting stronger sales growth but are also hurting the bottom line.
Selling, General, and Administrative Expense (SG&A) jumped to 21.3% of sales from 19.9% a year ago as the retailer added functionality like quicker delivery and an enhanced shopping experience for repeat customers. Executives said they expect to continue spending heavily on these initiatives this year and well into 2019.
Looking ahead
Inventory decreased 2.4% compared to a 3.9% total sales increase. This disciplined approach, combined with an improving flow of product, is making our inventory more productive overall and we feel that we are well-positioned to drive stronger results in the back half of 2018.
-- CFO Lauren Peters
Executives affirmed sales growth guidance that calls for a return to significant growth in the third and fourth quarters of this year. Their profit forecast was mostly steady, too, although management does see spending on the digital sales channel taking up a slightly larger portion of earnings than originally expected.
Foot Locker faces major challenges, including a weak international segment and flat traffic in the U.S. division. But its overall trends are tracking right along management's targets of returning to sales and profitability growth in 2018. From there, its long-term earning power will depend on management's success at positioning the company to better compete in an omnichannel selling environment.
