Investors are bracing for some potentially bad news from Foot Locker (NYSE:FL) in the next few days. The retailer announced surprisingly weak demand three months ago, and its latest results could have been pressured even more by Chinese tariffs and by the continued shift by shoppers to buy shoes directly from manufacturers such as Nike (NYSE:NKE).
Foot Locker's management team in late August expressed optimism that demand would strengthen over the second half of the fiscal year, and investors will be watching for confirmation of those trends in Friday's report. They'll be just as interested in hearing what CEO Richard Johnson and his team have to say about inventory levels and customer traffic heading into the biggest shopping quarter of the year.
Let's take a closer look.
Did the rebound continue?
The big headline from last quarter was slowing sales growth as comparable-store sales gains fell to 1% from 5% in the previous quarter. Executives at the time admitted that the results missed their targets, particularly in areas like apparel and in the wider U.S. retailing business that's seeing declining customer traffic.
Foot Locker gave shareholders a few reasons to hold out hope for a quick rebound, saying comps improved in the months of June and July to overcome a very weak May. If those trends continued through the summer, then the consumer retailer should report faster growth this quarter, perhaps closer to 5% than the 1% it last posted.
It's impossible to miss the stampede toward e-commerce in this space. Nike credits its direct-to-consumer push for delivering most of its growth lately, including a 42% revenue spike in the most recent quarter.
Foot Locker is attacking that popular channel, including by partnering with Nike in its digital shopping innovations. Yet management appears to understand that the seismic shift in shopping behavior means the retailer will have to adjust many new aspects of the industry, including changing the size, design, and geographical coverage of its stores.
Executives have promised to update investors on these efficiency metrics, so look for more details on the business shift on Friday. Those updates will become more important with each additional quarter of falling customer traffic in Foot Locker's U.S. store base.
Looking to the holidays
Foot Locker's fiscal year is mostly behind it, and its inventory is now set for the critical holiday shopping period. Those facts mean the chain should have a good reading about where sales will land for the year and how that might set the table for 2020.
As it stands today, that short-term outlook calls for comps to rise in the mid-single-digit range, implying faster gains in both the third and fourth quarters than what investors saw in Q2. Adjusted earnings are predicted to rise at a faster pace despite increased investments in wages and in the digital selling infrastructure. Three months ago, that outlook seemed optimistic given the demand challenges it was facing in the U.S. market.
On Friday, we'll find out whether investors were right to be skeptical about that outlook, or if instead, Foot Locker engineered a quick growth rebound to set itself up for a strong close to fiscal 2019.