Investors reacted harshly to Foot Locker's (FL 28.86%) latest earnings report, sending shares down by 19% after the retailer announced weak sales and falling customer traffic. Profitability dropped, too, as the chain spent heavily on its e-commerce initiatives.

CEO Richard Johnson and his team admitted in a conference call with Wall Street analysts that Foot Locker took a "step backwards" in a few areas, such as apparel, while succeeding in other categories such as men's basketball and running shoes. The management team also issued an optimistic outlook for the rest of the year based on a demand uptick over the last few weeks.

Let's take a closer look at what the chain's executives had to say about the quarter.

A jogger laces up before a run.

Image source: Getty Images.

Uneven results

I would describe our results for the quarter as challenging in some areas, on track on others, and importantly, showing sequential improvement throughout the period.
-- CFO Lauren Peters

Foot Locker's expansion pace fell to below 1% compared to 5% in the previous quarter. The performance was at the low end of management's guidance for the full year.

Executives said there were "pockets of strength," including the Canada geography and the Champs Sports brand. Yet the core U.S. business was soft, with customer traffic declining while average spending rose. Standout product categories included men's running and basketball, but apparel sales were weak.

Management was encouraged by the building momentum through the quarter, though, as comps were down slightly in May, rose slightly in June, and expanded at a robust mid-single-digit rate in July.

Inventory strength

We are able to continue flowing fresh exciting product, which keeps our inventory productive and positions us well for back-to-school and the remainder of the year.
-- Peters

Inventory fell 2% compared to the flat overall sales result, which left Foot Locker in a flexible position to stock hit new releases in the second half of the year. That setup, plus the uptick in demand toward the end of the quarter, formed the basis for management's prediction that revenue gains will rebound over the next few months. "We are well positioned to build positive momentum in the back half of 2019," Johnson said.

Steady profitability trends

We are still on target to deliver a mid-single digit comp gain with gross margin now expected to be up 10 basis points to 30 basis points, slightly lower than our previous range. We now expect [selling expenses] to be up 30 basis points to 50 basis points, a slight improvement versus our previous guide.
-- Peters

Foot Locker lowered its gross profit margin forecast to account for the weaker performance in the second quarter. The company plans to scale back a bit on its spending plans, though, and so the broader earnings outlook hasn't changed. Executives are still predicting that adjusted earnings will outpace sales, which are on pace to rise in the mid-single-digits.

That forecast assumes growth will speed up sharply over the next six months. It also relies on a muted impact from the continued shift toward the e-commerce selling channel, which carries weaker profit margins. Finally, the retailer's updated outlook doesn't incorporate any potential issues arising from new tariffs that could hit most consumer goods stocks over the coming weeks.

Put it altogether, and these issues add lots of uncertainty to Foot Locker's results over the short term. Given that risk, investors decided to revalue the stock as if the most recent trends will carry through for the rest of the year. A rebound, then, likely won't happen until the chain can demonstrate over its next few quarterly reports that it is on track with its aggressive growth forecast.