Please ensure Javascript is enabled for purposes of website accessibility

Foot Locker Earnings Preview: Aiming for Another Record Year

By Demitri Kalogeropoulos - May 20, 2019 at 5:10PM

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

The footwear retailer posts its first-quarter earnings results on Friday, May 24.

Earlier this year, Foot Locker (FL 1.80%) overcame weak customer traffic during the holiday season to post a return to sales growth for the full 2018 year. The retailer benefited from the fact that inventory and demand finally returned to balance after getting far out of whack in the prior year. It didn't hurt that Nike supplied Foot Locker with a flood of innovative product releases, either.

Nike and other footwear manufacturers are increasingly making direct sales to consumers, and those moves might pressure Foot Locker's results. Still, the chain has its own aggressive digital selling plans that management believes will help deliver another year of record revenue and increasing profitability in 2019. Investors will get good data points showing whether Foot Locker can reach that goal when the company releases its first-quarter results on Friday, May 24.

A woman exercising.

Image source: Getty Images.

The traffic trends

The retailer's stores are clustered in and around malls, and that makes them highly dependent on foot traffic in these areas. The company also needs a steady pipeline of product releases to give customers reasons to shop at its physical locations. Both these trends worked against Foot Locker in 2017, and the result was a 5% sales slump at existing stores and sharply reduced profitability.

Foot Locker bounced right back to growth last year, though, due to two trends that the company hopes will continue lifting results in 2019. First, footwear manufacturers stepped up their innovation release schedules to support healthier traffic trends. Second, Foot Locker's digital sales accelerated, jumping to a 12% gain versus 7% in the prior year. Investors will be looking for another robust result in this sales channel on Friday, along with continued modest growth in physical stores. 

Getting more profitable

The retailer notched a slight increase in gross profit margin over the past 12 months, but the 0.2 percentage point boost only won back a small portion of the 2.3 percentage point loss it reported in 2017. Management said back in early March that industry conditions should support another increase this year, and the gain might be stronger since Foot Locker entered the year with a leaner inventory position.

CEO Richard Johnson and his team are hoping to capitalize on that flexibility by selling most of Foot Locker's products at full price in 2019. Cost cuts and increasing efficiency should contribute to faster earnings growth, too, and investors will be looking for evidence of that success in an improving operating margin. Last year that key metric rose to 6.9% of sales from 6.6%. But it's still a long way from the 8.4% record Foot Locker set back in 2016.

That outlook

CFO Lauren Peters told investors they could expect another year of accelerating sales gains in 2019, with comparable-store sales rising in the mid single digits compared with last year's 1.1% uptick. Achieving that result would put the retailer back on the growth pace it was enjoying before conditions took a turn lower in 2017.

Earnings should rise at a much faster double-digit rate thanks to favorable trends, including the higher proportion of new products, reduced promotions, and a more efficient supply chain. Yet Foot Locker's biggest challenge might be navigating the shift toward online selling as its suppliers do more business directly with customers. The retailer can likely still serve a large and profitable industry niche, but the next year should tell investors a lot about whether the e-commerce shift will hurt the chain's long-term earnings power.

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
$33.29 (1.80%) $0.59

*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 service.

Stock Advisor Returns
356%
 
S&P 500 Returns
124%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

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.