What happened
Shares of Foot Locker (FL 0.23%) were up 6% as of 11:30 a.m. ET on Thursday, a day after the athletic retailer cuts its forward earnings guidance and paused its quarterly dividend.
Analysts were lowering their near-term earnings estimates for the company, but the steep sell-off on Wednesday attracted bargain hunters that provided support for the stock.
So what
The correction in the stock following disappointing earnings news yesterday appears to be priced at these share prices. Even as analysts revise their earnings estimates for the full year, Foot Locker now trades at a forward price-to-earnings ratio of 8.7, which is consistent with its previous trading history.
Still, Foot Locker hasn't been a monster growth stock in recent years. Revenue has increased at a low-single-digit rate over the last 10 years, with profitability deteriorating recently.
The company is executing on its Lace Up strategy to return to sustainable growth in 2024, but unless the consumer feels like spending money, it might be difficult to achieve those objectives. Part of those plans involve revitalizing its relationship with Nike, but even the leading sneaker brand has reported slowing revenue growth.
Nike reported a 5% year-over-year increase in the May-ending quarter, down from 14% in the previous quarter, which appears to have impacted Foot Locker this quarter. Still, Foot Locker doesn't want to depend on Nike but is trying to diversify its assortment with other brands.
Now what
Investors had been hopeful for a strong finish to the year with the holiday shopping season around the corner. But those hopes were dashed by management's commentary of softening sales trends in July.
Foot Locker is still committed to its Lace Up strategy, but earnings results may get worse before improving. Despite sales down in the quarter, inventory levels were up 11% over the year-ago quarter, which means more price-cutting and reduced margins to clear it out.
