What happened
Shares of Foot Locker (FL 0.23%) were trading down 25% as of 11 a.m. ET on Friday after the retailer announced disappointing sales performance for the first quarter.
Total sales fell 11.4% year over year, with comparable-store sales down 9.1%. Management lowered its guidance for the year, which sent the stock tumbling.
So what
The company has struggled to deliver consistent revenue and earnings growth, which has contributed to the stock's underperformance in recent years. But this quarter was particularly disappointing, given strong comparable sales performance in the fourth quarter.
Coming off a 4.2% increase in comp sales in the fourth quarter of 2022, Foot Locker's weak sales to start 2023 reveals more than a weak consumer spending environment. One of its key suppliers, Nike, has reported strong demand for footwear lately, which shows that Foot Locker is suffering from competitive problems within the retail market.
Foot Locker reported a lower profit of $36 million compared to $133 million in the year-ago quarter. Lower margins, driven by higher markdowns, occupancy costs, inflation, and investments in wages and technology, led to the lower profit.
Now what
Management previously stated the goal to reach $9.5 billion in annual revenue by 2026, with a high-single-digit operating profit margin. CEO Mary Dillon said the company is still "making early progress to build a strong foundation to return to sustainable growth beyond this year."
Investors should expect more volatility in the near term. Management now expects full-year comp sales to decline between 6.5% to 8%, which should translate to adjusted earnings per share between $2.00 to $2.25.
Foot Locker has looked very cheap on a price-to-earnings basis (the P/E is currently 5.8), but this episode is a reminder that it's generally better to stick with higher-quality retail stocks, even if that means paying a higher premium.
