If you've been waiting for a cheaper price to buy Foot Locker (FL +0.00%) stock, this could be your chance. The retailer's shares have declined significantly in 2023 even as the wider market became more expensive through mid-July.
There are major concerns about the business to go along with that share price drop, though. Foot Locker is seeing sharp sales declines today, and earnings are shrinking even faster thanks to increased discounting in the footwear industry.
Let's take a closer look at its 2023 momentum, with an eye toward whether the stock seems like a bargain at these discounted prices.
Painful downgrade
Investors had low expectations heading into Foot Locker's May earnings update. But those goals turned out to be far too optimistic. Sales through late April fell 9% at existing locations, missing management's short-term outlook. Slowing consumer demand forced the company to pivot toward a more aggressive markdown strategy, which hurt earnings as well.
NYSE: FL
Key Data Points
Gross profit margin shrank by 4 percentage points and operating income was further pressured by the declining sales footprint. Overall, net income plunged to just $36 million compared to $133 million a year earlier. "Our sales have...softened meaningfully given the tough macroeconomic backdrop," CEO Mary Dillon said in a press release .
No quick rebound
Investors can't count a quick rebound ahead, either. Management reduced its 2023 outlook and now expects comparable-store sales to fall by between 8% and 9%, rather than the prior range calling for declines of between 4% and 6%. Executives predict sluggish demand at least through the end of the year, consistent with the trends that influenced fiscal Q1.
Earnings will be unusually weak this year, too, as Foot Locker focuses on reducing inventory to get its merchandise levels back in line with demand. The company is making progress at diversifying its revenue base while cutting costs, but it will be at least fiscal 2024 before Foot Locker is on a clear path back toward sustainable growth.
The path forward
As you might expect, investors are being offered a big discount to purchase a stock with such major short-term challenges. Shares are priced at just 0.3 times annual sales compared to Nike's multiple of 3.3. Target, another retailer struggling through a growth hangover, is valued at roughly 0.6 times sales.
It's possible that Foot Locker's valuation will expand over the next several quarters as management makes progress at stabilizing sales and profitability trends. Watch the all-important comps metric for signs of progress here. But Foot Locker also needs to start turning its operating profit margin back toward the 12% of sales that investors saw as recently as 2022. Without a rebound in this area, the stock will likely continue trailing the market.
Overall, this investment seems too risky for investors to buy right now. There are many more compelling opportunities in the industry, including Nike and Lululelmon Athletica. In contrast with Foot Locker, these retailers have more control over the flow of innovation in their pipelines. They have direct relationships with their customers, and they are highly profitable today. Consider those stocks before being tempted by the latest drop in Foot Locker's shares.
