Even good long-term plans can come under pressure because of short-term headwinds. But investors appear to be in a "show me" mood with regard to Foot Locker (FL 0.23%). That's a problem for the sneaker retailer, given that its big turnaround effort is off to a rough start.
Here's what investors need to know.
Foot Locker's plan for the future
Foot Locker is working on what management dubs the "Lace Up" plan. The big-picture goals are to expand sneaker culture, power up the portfolio, deepen relationships with customers, and become a best-of-breed player in omnichannel selling. Those are kind of vague, but reading into the list a little, it is probably appropriate to summarize the retailer's goals as wanting to resonate more with sneaker buyers, offer more on-trend products, and improve financial results. Pretty normal turnaround fare.
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The company is taking a number of actions in pursuit of those goals. For example, it is shutting underperforming store brands so it can focus more on its best nameplates. Within its store footprint, it is closing mall stores and opening new locations outside of malls that will have a new design. The company is also repositioning its Champs store concept to expand its product lineup and differentiate it from the Foot Locker brand. And, while all this is going on, the company is trying to cut costs.
There are a lot of moving parts here. But, as far as it goes, the goals and plans seem reasonable. That said, it is not a one-year effort -- the plan is expected to take several years to complete. Investors, however, seem to be worried, and the stock price fell dramatically after Foot Locker reported a tough fiscal Q1 2023 (ended April 29).
Getting off on the wrong foot
Foot Locker's fiscal first-quarter results were tough reading. Overall sales were down 11.4% year over year. Comparable-store sales sank by 9.1%. That's pretty bad and suggests that the turnaround plan is, perhaps, on a weaker foundation than previously thought. Worse, the company materially reduced its full-year guidance for both metrics.
At the start of its fiscal 2023, Foot Locker was expecting full-year sales to fall by 3.5% to 5.5%. Now management's guidance is for sales to decline by 6.5% to 8%. Comparable-store sales were expected to decline by 3.5% to 5.5%, but are now projected to fall by between 7.5% and 9%. It's little wonder investors dumped the shares after seeing that update, which basically went from bad to worse.
But that's not all. Gross margin dropped by 4 percentage points year over year while costs increased by 1.1 percentage points. Inventory levels, already high, rose 25% year over year. So costs are up, profits are under pressure, and products aren't moving as expected. Just one quarter into the turnaround plan, it looks like the company's efforts are off to a tough start after management cut more than a dollar off its full-year adjusted earnings per share guidance.
Turnarounds take time, so it is too soon to suggest that Foot Locker's plan is a failure. But the goals outlined above require money to implement, so the weak financial results mean that the Lace Up effort is getting more difficult to afford. That's a concerning fact that increases the risk of failure, or at least the risk that the plan will not fully achieve its expected results.
Time to pay closer attention
There is a possibility that the first quarter's weakness came from near-term challenges that Foot Locker can overcome. There is also a chance that they have set its larger turnaround goals back. If management has to focus more on the near term, that by necessity would mean less focus on the long-term Lace Up goals.
This turnaround got off to a slow start. Investors should pay extra attention to Foot Locker's quarterly updates for the next year or so to see if management can get the Lace Up plan back on track.
