Before the market opened on Wednesday, Foot Locker (FL 0.23%) published results for its fiscal second quarter, which ended July 29. It would be an understatement to say that the report arrived with very little for investors to be excited about.
Between sales and earnings that missed the market's expectations, an announcement that the company is suspending its dividend, and another big round of guidance cuts, it was the kind of earnings update that shareholders have nightmares about.
Unsurprisingly, Foot Locker is getting pummeled in Wednesday's trading, with its share price down roughly 28% at market close. The stock now trades at its lowest price in the last 12 years.
Should investors be buying on the precipitous pullback? Let's take a look at the company's concerning Q2 report and a look at what comes next for Foot Locker.
What went wrong in Q2?
Foot Locker posted non-GAAP (adjusted) earnings per share of $0.04 on sales of $1.86 billion in Q2. Meanwhile, the average analyst estimate had called for the business to see adjusted earnings of $0.05 on sales of $1.88 billion.
Wall Street had already been anticipating that the business would see headwinds in the face of a somewhat challenging retail market, but the 9.9% year-over-year sales decline posted by the business came in worse than expected.
Management attributed the relatively weak Q2 performance to "consumer softness," and it's not unreasonable to think that shoppers have broadly become more cautious amid the current macroeconomic backdrop. These challenges will likely get worse before they get better.
Foot Locker said that it saw headwinds intensify in July, and the trend caused the company to issue substantial downward guidance revisions. The footwear and apparel retailer also suspended its dividend in response to the challenges it's currently facing.
Prior to the post-earnings share price collapse, Foot Locker stock offered a dividend yield of roughly 6.9%. Shareholders of record as of Oct. 13 will still receive the company's scheduled quarterly distribution of $0.40 per share, but dividend payments will be on hold after that point.
What comes next?
After seeing adjusted earnings decline from $7.27 per share in fiscal 2021 to $4.95 per share in fiscal 2022, Foot Locker management indicated that its current fiscal year would mark the beginnings of a turnaround that would get the business back on the right track. The company never said profits would rebound this year, but it's clear things aren't proceeding as planned.
The table below tracks changes in guidance for fiscal 2023 performance across the company's last three updates.
| Guidance Timeline | Projected Sales Decline | Projected Adjusted Earnings Per Share |
|---|---|---|
| Guidance issued March 2023 | Between 3.5% and 5.5% | Between $3.35 and $3.65 |
| Guidance issued May 2023 | Between 6.5% and 8% | Between $2 and $2.25 |
| Guidance issued August 2023 | Between 8% and 9% | Between $1.30 and $1.50 |
Data source: Foot Locker.
Same-store sales are now projected to fall between 9% and 10% this year. In May, the decline was expected to be between 7.5% and 9%. In March, guidance targeted a drop between 3.5% and 5.5%.
Due to calendar differences between the company's previous and current fiscal years, Foot Locker also has the benefit of a 53rd week in the current term. So, the performance decline is actually steeper than a basic year-over-year comparison would suggest.
Foot Locker looks cheap, but there's too much uncertainty
Following today's share-price crash, Foot Locker is valued at roughly 11.5 times its midpoint target for adjusted earnings of $1.40 per share this year. The business has been solidly profitable in recent years, but it's hard to be confident in the company's long-term prospects in light of recent trends.
There's no doubt that Foot Locker is facing some significant macroeconomic headwinds. While various economic trackers and metrics may give conflicting indicators, it seems clear that many shoppers are still struggling. Inflation has run rampant over the last two years, and people are feeling the squeeze of paychecks that don't go nearly as far as they used to.
But it's also clear that the turnaround plan that the company has been implementing isn't working. Irreversible trends may be somewhere near the heart of these woes.
Many Foot Locker stores are located in shopping malls that are seeing traffic evaporate. As malls broadly continue to decline, Foot Locker loses the opportunity to win customers.
Management got investors excited about a potential turnaround, and the initiative seems to be falling flat so far. That makes it harder to get excited about the stock even on the heels of big sell-offs.
