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Foot Locker Laces Right Back Up

By Demitri Kalogeropoulos - Nov 24, 2019 at 10:07AM

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The retailer's growth rate rebounded following a tough second quarter.

Foot Locker ( FL -0.14% ) investors can stop holding their breath. After the retailer announced surprisingly weak second-quarter results back in August, operating results improved significantly over the following three months.

The footwear specialist also revealed healthy profitability this week and a trim inventory position heading into what management described as the "all-important" holiday selling season.

Let's take a closer look at Foot Locker's results.

A jogger running an outdoor trail.

Image source: Getty Images.

Sales rebound

CEO Richard Johnson and his team said in late August that growth trends would likely pick back up toward the second half of the year, despite sluggish results in the second quarter. That's exactly what happened. Comparable-store sales growth sped up to 5.7% from 1%. The boost lifted year-to-date growth by a full percentage point to 3.8%.

Foot Locker credited a few factors for the improved expansion rate, including the company's draw with younger consumers and its e-commerce partnership with major suppliers like Nike. "The strong results we delivered," CFO Lauren Peters said in a press release, "reflect our work to drive the top line, while continuing to strengthen our operational execution."

Accelerating profits

Investors were treated to several positive metrics to back up that claim of improving operational execution. Gross profit margin rose to 32.1% of sales from 31.6% a year ago despite extra pressure from rising tariff prices. The fear on Wall Street was the profitability might move in the opposite direction. Selling expenses ticked down, too, falling to 21.3% of sales from 21.4%.

These two trends combined to power significantly higher operating income, which jumped to $164 million from $144 million a year ago. A large tax burden shift more than offset that gain, though, and so net income fell to $125 million compared to $130 million. Still, Foot Locker reported a slight increase in per-share earnings thanks to its aggressive stock repurchase spending.

Inventory and outlook

The consumer stock is entering the holiday season with a slim inventory position. After dipping 1% in the second quarter, inventory held flat this quarter despite a more-than-5% increase in sales. Its cash position is healthy, too, with over $700 million on the books compared to debt of $122 million.

Without issuing a specific update to Foot Locker's outlook, executives expressed confidence in its momentum. "We are making great strides in implementing our strategic imperatives," Johnson said, "which are designed to ensure we are best positioned to compete in the retail marketplace by inspiring and empowering youth culture while also strengthening our bottom line." Peters added that the team is focused on execution "as we enter the all-important holiday selling season."

Foot Locker's 2019 outlook calls for sales to rise in the mid-single digits with a slightly faster increase in operating income. Both of those projections seemed at risk after the second-quarter report, but they look more achievable today. As usual, though, most of Foot Locker's success this year will come down to how well the company can perform during the ultracompetitive holiday shopping period.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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