Investors had low expectations heading into the second-quarter earnings report for Foot Locker (FL -1.79%). The retailer had already announced that it returned to sales growth in the period, but its profit outlook seemed weak. The footwear and sports apparel industry might be looking at a long period of pricing challenges that push margins lower, as in fiscal 2018.

Foot Locker's Q2 report didn't settle that key financial worry for shareholders. But the announcement contained some encouraging signs that the business is mending in the wake of COVID-19 shutdowns.

Let's take a closer look.

A customer shops for shoes.

Image source: Getty Images.

Pent-up demand

Revenue roared back to growth, with comparable-store sales jumping 19% year over year compared with 40% declines during the maximum shutdown months of March, April, and May. That spike indicated pent-up demand from shoppers, many of whom were flush with cash from federal stimulus support.

In a press release, CEO Richard Johnson said, "As our global fleet of stores reopened, our customers responded with enthusiasm and energy to our assortments, and visited out stores with a high intent to purchase."

Foot Locker also returned to overall profitability, although its financial metrics were far from fully recovered. Gross profit margin dived to 26% of sales from 30% because of industry pricing pressures. As a result, operating income fell to $69 million, or 3.3% of sales, from $81 million, or 4.6% of sales a year ago. Per-share earnings landed at $0.43, down from $0.55 last year.

Financial updates

Foot Locker left the quarter in a strong inventory position, which gives it lots of flexibility to respond to shifting consumer shopping trends in the second half of 2020. That flexibility was bolstered by its rising cash levels and minuscule debt holdings.

Together, these factors have management feeling confident enough about Foot Locker's finances that the company is resuming its dividend, albeit at a reduced rate. The chain plans to pay $0.15 per share in dividends this quarter versus its prior $0.40 per share. Executives called this a "cautious but meaningful" first step toward more-normal capital returns.

Foot Locker isn't in a position to predict where sales trends might land over the next few months given significant questions around the pandemic, school and sports seasons, and further federal stimulus legislation that's being debated today.

A tough second half to 2020

While those challenges suggest a tough selling environment into early 2021, the retailer appears to have put the worst of the pandemic's impact behind it. The resumed dividend payment is a good indicator that the financial crisis has passed for the company.

Meanwhile, Foot Locker's slim inventory holdings give it a decent shot at maintaining positive sales growth metrics over the holiday shopping season. And, assuming economic trends continue improving, it might not be long before investors see the chain's dividend return to its prior level after just a brief pause in early 2020.

On the other hand, a persistent recession might force more price cuts and inventory write-down charges over the next few quarters. That means it will be some time before investors can feel confident that the retailer is back on a firm sales footing.