What happened
Shares of Foot Locker (FL -4.11%) fell 39.7% in May, according to data from S&P Global Market Intelligence. The athletic apparel and footwear retailer's first-quarter earnings report fell far short of Wall Street's expectations, followed by a stream of bearish post-earnings reports on the stock. If negative market reactions were football penalties, this flag stands somewhere between unsportsmanlike conduct and an illegal blindside block -- some of the harshest penalties in the football rulebook.
So what
The official analyst consensus estimates for the first quarter had called for earnings near $0.81 per share of top-line sales of roughly $2 billion. In reality, Foot Locker could only muster $0.70 of earnings per share and $1.93 billion in revenue.
Foot Locker's management pointed to a tough macroeconomic environment and slashed full-year earnings guidance by nearly 40%. On the upside, the dividend held steady at $0.40 per share, per quarter, despite some speculation about an upcoming payout cut.
Now what
As painful as last month's stock price drop was, there may be more penalties in store for Foot Locker and its unfortunate investors. For example, the company can ill afford those coveted dividend payouts while also burning $118 million of operating cash flows in the first quarter. All told, Foot Locker consumed more than one-third of its cash reserves during this period. At the same time, its warehouses are bulging with rising piles of unsold athletic gear:
FL Inventories (Quarterly) data by YCharts
The last real upside of owning Foot Locker stock is the soaring dividend yield, which now works out to 6.4% per year. However, even that silver lining won't help if the company decides to cut its quarterly dividend checks or even halt them entirely -- and that uncomfortable strategy only looks more necessary as the quarters go by.
Foot Locker's disappointing first quarter, combined with an increasingly challenging macroeconomic environment, make it a tough stock to recommend at this time. Its financial performance, dwindling cash reserves, and growing inventory levels raise significant concerns. Despite the attractive dividend yield, the sustainability of these payouts is in question.
If Wall Street had a penalty box, that's where I would send Foot Locker's stock these days. Investors should approach the sports-themed store chain with caution, keeping a close eye on the company's ability to manage its cumbersome inventory, stabilize those dwindling cash flows, and maintain its rickety dividend. I don't mind staying on the sidelines while watching Foot Locker tackle a whole team of serious issues.
