It's been a tough year for Foot Locker (FL 0.23%), and by extension, its shareholders. The stock is down 44% from its 2023 peak, with most of that loss taking shape shortly after May's release of its first-quarter results.
Same-store sales slipped 9.1% year over year, prompting the company to lower its full-year guidance for a slew of fiscal performance measures. The effective end of COVID-19 pandemic restrictions seems to be working against this sneaker-centric retailer. Investors are concerned that this headwind could continue blowing indefinitely.
As Warren Buffett teaches us, though, we should be fearful when others are greedy, and greedy when others are fearful. This worry-based weakness is ultimately a buying opportunity fueled by a company-wide, top-down overhaul that most investors seem to be looking right past.
Meet the new and improving Foot Locker
Discretionary retailing is a fickle business. It's even more volatile when your best-selling products are sneakers endorsed by professional athletes, and professional sports team jerseys. The business requires high-profile superstars at the same time it depends on people being interested in athletic wear and team wear.
But people aren't always inclined to pay steep prices for gear they don't entirely need. Never even mind that malls are still struggling to draw the sorts of crowds they used to in the past.
Foot Locker is responding to its biggest current challenges, though. It's called the "Lace Up" plan. Unveiled in March of this year, the turnaround plan starts with the closure of around 400 underperforming Foot Locker stores and 125 Champs Sports stores.
No, it's not exactly a step in the right direction. It's all part of a major revamp, however. At least 250 of those locations will be reopened with a new concept. Sports will still be their central theme. But their merchandise assortment should have even wider appeal, including a brand aimed specifically at younger children.
The planned overhaul isn't just a rethinking of Foot Locker's existing 2,700-store footprint. The company's also embracing the digital ecosphere more than it ever has in the past. This includes mobile-based shopping. While most of its site's current web traffic comes from mobile devices, this traffic doesn't turn into a sale often enough. As it stands right now, only about 17% of the retailer's total revenue is digitally driven.
But that's changing. By improving the app, building a better database, and then beefing up this investment with a new and improved customer loyalty program (program participants tend to spend more), Foot Locker believes that one-fourth of its business could be done online as soon as 2026.
It's not just an overhaul of its operation and branding working to the retailer's advantage, either. In March, CEO Mary Dillon touted a fully rekindled partnership with popular athletic apparel brand name Nike, which has been working to sell more of its own goods in its own stores. It had been a highly symbiotic relationship, and will likely be one again now.
Analysts expect the plan to restore growth
These all seem like the right initiatives to reinvigorate the store chain, so why isn't the stock soaring? For the same reason Foot Locker's first quarter of this year was anything but thrilling. That is, change takes time.
Change for the better is coming, though, at least according to the analyst community. While sales for the entire year are likely to remain flat -- as are earnings -- things should start perking up afterward. Fueled by the Lace Up initiative's effect, revenue is projected to grow by 3% next year, followed by further growth at least through 2026. Profits are expected to grow at an even faster clip once the turnaround plan starts gaining real traction beginning in 2024.
Data source: StockAnalysis.com. Chart by author.
Foot Locker's shares are priced affordably in the meantime. The stock's present price is less than 13 times this year's expected per-share bottom line -- and under nine times next year's projected profit. That's a cheap price-to-earnings multiple even within the relatively slow-growth retail arena.
Bringing more upside than downside to the table
The wobbly economy is no small matter for Foot Locker. When times are good, people will gladly pay well in excess of $100 for the right pair of celebrity-affiliated sneakers. When tough times and brisk inflation rear their heads, however, buying groceries takes precedence over buying a pair of shoes that could very likely never even be worn.
Now that Foot Locker's shares are down 44% just since March's peak, however -- and down 60% from its 2021 high -- the worst-possible-case scenario may already be priced in, and then some.
It will take some time for the "Lace Up" turnaround plan to start gaining measurable traction. The stock's apt to start performing before the plan's potential starts shining through in the company's results, however, particularly given the severity of the sell-off over the course of the past four months. If you can stomach the volatility, this is where you hold your nose and dive in.
