What happened

By now you've probably heard the news: Foot Locker (FL 0.41%) stock crashed 27.5% (through 2:30 p.m. ET) after reporting a big earnings miss this morning -- and it's taking down along with it basically everybody else in retail clothing.

Under Armour's off 3%, obviously, and Nike nearly 4%, which also makes sense. North Face- and Timberland-owner VF Corp. (VFC 1.31%) is getting hurt even worse, down 8.3% in sympathy with Foot Locker's news. Kohl's (KSS 1.77%) is crashing 8.2%. And The Children's Place (PLCE 1.75%) is off an unlucky 7%.

So what

So it's looking like a lousy day to be invested in retail stocks, retail clothiers in particular. But should it be?

Actually, maybe yes, it should.

Foot Locker reported only an 11% decline in sales for Q1 2023 -- worse than expected, but not devastatingly so. On the other hand, the company reported a truly astounding 56% decline in profits, which was 14% worse than even Wall Street had forecast. Sales have "softened meaningfully, given the tough macroeconomic backdrop," warned CEO Mary Dillon.  

Now what

And things are getting worse, not better.

Dillon warns that Foot Locker must "reduce our guidance for the year as we take more aggressive markdowns to both drive demand and manage inventory." Instead of the $4.95 per share that Foot Locker earned in 2022, or the $3.35 to $3.65 that it was hoping to earn as recently as yesterday, Foot Locker now guides investors to expect no more than $2.25 per share in profit this year, and perhaps as little as $2 -- as much as a 60% drop in profits.

That's a truly devastating result for a company that sees sales falling no more than 8% this year -- profits falling as much as 7.5x faster than sales. It implies very deep discounting by the sportswear retailer, and very tough competition for companies like Kohl's, VF Corp., and Children's Place that must match those prices or lose those sales to Foot Locker this year.

Even worse: None of these three retailers appear to be very well positioned to weather this storm. Children's Place, the smallest of these three retailers, currently carries a scary $512 million in debt, which is more than its own market capitalization. Likewise, Kohl's, valued at $2.7 billion, is lugging around $7.6 billion in debt.

VF Corp. -- the biggest of the bunch at a $8.6 billion market cap -- is a bit better positioned, with a $7.5 billion debt load and a comforting $571 million in cash.

At 21 times earnings, I wouldn't exactly call VF Corp. a "cheap" stock. But of all the retail stocks following Foot Locker lower today, it's potentially the least-worst of three bad options.