Judging by the stock's 2023 performance thus far, Wall Street has very low expectations for Foot Locker's (FL 0.23%) returns. The retailer's shares are down over 30% through late July even as the wider market is up 20%. Foot Locker is also trailing industry peers like Nike (NKE 0.19%) and Crocs (CROX 1.53%) so far this year.
There are some good reasons for these performance disparities. Foot Locker's last earnings report showed mounting pressure on the business from weak demand. The footwear and apparel seller has limited options available to engineer a quick rebound, too.
Yet the stock is priced low enough that it might generate solid returns even in a slow-growth scenario. With that in mind, let's look at whether Foot Locker stock is a buy right now.
Dropping the outlook
The company's last earnings update was not encouraging. Foot Locker missed management's short-term targets in early 2023 as sales declined 9% year over year. This slump occurred even as prices were cut across many footwear categories so that shoppers remained engaged. "Our sales ... have softened meaningfully given the tough macroeconomic backdrop," CEO Mary Dillon said in a press release.
Nike executives described similar pressure from slowing consumer demand and excess inventory in some niches. Yet the footwear manufacturer is still expanding sales at a solid clip. Likewise, Crocs is enjoying solid growth in the competitive market today.
Foot Locker's profit trends aren't encouraging
Foot Locker's finances are worsening, too. Gross profit margin fell by 4 percentage points last quarter compared to Nike's more modest 1-point drop. Crocs is enjoying higher gross profits, for context.
The picture isn't any brighter on the bottom line, either. Foot Locker's net income fell to just $36 million in Q1 from $133 million a year ago. Executives in mid-May lowered their 2023 adjusted earnings forecast to between $2 and $2.25 per share from the previous target range of $3.35 to $3.65 per share. Profit pressures will last at least through the 2023 fiscal year, management warned.
The reason to hold of Foot Locker
Those are bleak operating and financial trends, but investors still shouldn't abandon this stock because there is so much pessimism embedded in its share price. Foot Locker shares are priced at less than 0.3 times sales today, down from 0.8 in January. Crocs is priced at 1.7 times sales and looks attractive as a growth stock. Nike will appeal to risk-averse investors even though it is valued at a premium of 3.3 times sales.
Foot Locker's weak operating trends, as well as the limited control it has over the merchandise it stocks, keep it from being a clear buy right now. Plus, there are more attractive options in the footwear industry.
It's true that holding shares today might result in positive returns for shareholders willing to sit through the upcoming volatility, and a continuing period of soft sales and earnings, into 2024. But most investors will want to simply watch this stock from the sidelines until Foot Locker can show that it has a clear path back toward sustainable sales and earnings growth.
