Foot Locker (FL +0.00%) investors have been sour on the stock in recent months. That downbeat assessment has been mainly powered by worries about the potential for slumping profit margins. The footwear retailer added to those concerns by lowering its 2019 earnings prediction in its first-quarter report back in May.
On Friday, the chain has an opportunity to shift the negative narrative that sees stalling sales gains and reduced profitability coming from spiking tariff rates on Chinese imports. Below, we'll look at a few numbers that will demonstrate whether those concerns have been overblown.
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1. Sales growth
Foot Locker achieved a healthy sales growth rebound in 2018 following the prior year's brutal decline. But that momentum didn't carry over to the first few months of the new year. Instead, comparable-store sales gains landed at 5% in the fiscal first quarter. Many retailers would call that expansion rate a success, but for Foot Locker, it marked a significant slowdown from the prior quarter's 10% spike and the 6% gain it achieved over the full 2018 year.
That variability puts the pressure on the chain to show stabilizing trends as it heads into the most important part of its fiscal year. Another slowdown on Friday would suggest sales gains might be modest this year, while a rebound would be a welcome surprise for shareholders.
2. Margin trends
The bigger concerns for investors these days are around costs. Foot Locker has been spending aggressively to expand its e-commerce abilities while upgrading the in-store shopping experience. Management has expressed confidence that the moves will deliver strong returns, but recently, shareholders have just seen the moves pressure earnings results.
Friday's report will show whether this earnings headwind continued and whether recent tariff rate increases disrupted Foot Locker's business. Both issues would show up in reduced adjusted profit margin. That metric edged down to 9.3% of sales last year from 9.9% in 2017 and 13% in each of the previous two years. Management is aiming for a slight rebound starting this year.
3. The 2019 forecast
Foot Locker's 2019 outlook so far has been vague, with CEO Richard Johnson and his team only predicting modest sales growth of around 3% and a slight boost in operating margin. But with half of the fiscal year now behind it and with the holiday-season product lineup mostly set, executives will have a better idea about where growth might land for the year. It would be prudent to assume no improvement in the tariff picture from where it stands today, too.
That all sets up a critical update to the chain's outlook on Friday. Investors appear to be bracing for a stable forecast or a slight downgrade that incorporates weaker demand trends and reduced profitability as Foot Locker absorbs some of the costs from increased tariff rates. Any dramatic move in the stock price, meanwhile, will likely come from management's comments about how they see the holiday season shaping up. Last year's peak shopping season was a strong one for the chain, but it will be harder to build on that success if industry trends haven't improved over the last few months.
