What happened

Foot Locker (FL 0.60%) shareholders lost ground to a falling market this week as the stock dropped 15% through Thursday trading compared to a 3.2% slump in the S&P 500, according to data provided by S&P Global Market Intelligence. The drop added to a rough year so far for the footwear retailer, which is down 40% so far in 2022.

It was driven by a poorly received earnings report from Nike, Foot Locker's key retailing partner.

So what

Nike said on Monday that sales trends held up well through late May and that consumer demand remained strong in key markets like the U.S. and Europe. However, the company revealed a large inventory spike that had investors worried about the potential for write-down charges or price cuts ahead.

In fact, Nike said that profitability would fall again in the current fiscal quarter after gross profit margin slipped by 1 percentage point in the fiscal fourth quarter.

Foot Locker's stock often moves in tandem with Nike, which is in the process of stepping back from its wholesale retailing partnership. Foot Locker still counts most of its sales as coming from Nike products, though that reliance is declining as Nike stresses its own direct-to-consumer marketing.

Now what

Investors won't have to wait long for answers on these key growth questions. Foot Locker's fiscal second-quarter announcement will arrive in late August and should include fresh data on customer traffic and inventory holdings heading into the key holiday shopping period.

Management's last update, in May, contained a modest upgrade to that outlook. Comparable-store sales are expected to fall by about 8%, they projected at the time.

The next earnings release will show whether Foot Locker still believes it has the right amount of inventory given current consumer confidence levels. The retailer's decline this week reflects the judgement on Wall Street that sales and profits might be under more pressure in the second half of this year.