Foot Locker (FL 0.23%) shares might seem like a tempting bargain right now. The footwear specialist's stock price is down more than 51% so far in 2023, compared with a 17.4% spike in the S&P 500.
Sure, Foot Locker is seeing weak demand today, and earnings are being pressured by aggressive promotions by rival retailers. But these poor industry conditions won't last forever, and management is optimistic about their rebound strategy for the holiday season and beyond.
Investors shouldn't jump into this turnaround story, though. There are better ways to gain exposure to this industry. Let's take a closer look.
Not good results for Foot Locker
Management said in late August that second-quarter sales were mostly in line with their expectations, except that demand trends worsened significantly toward the end of the selling period, which ran through late July. Comparable-store sales fell 9%, matching the rate of year-over-year decline that investors saw in the previous quarter.
That sales slump occurred despite Foot Locker's aggressive price cutting aimed at keeping inventory moving through its stores. Gross profit margin fell by 4 percentage points, and the company generated a loss of $5 million, compared with a $94 million profit a year earlier. Executives lowered their sales and earnings outlook for the full year and now see revenue falling by between 8% and 9% rather than the prior target range of between 6.5% and 8%.
Consider Nike instead
Foot Locker shares have been discounted sharply to reflect those painful financial trends. You can now buy the stock for less than 0.2 times annual sales, the lowest valuation in over a decade. Yet investors should consider passing on that deal and buying Nike (NKE 0.19%) instead.
The footwear and sports apparel manufacturer reported a 16% year-over-year sales increase for the quarter that ended in late May. That growth included an 18% year-over-year spike in direct-to-consumer sales, which management is prioritizing over sales to wholesale partners like Foot Locker.
Unlike the struggling retailer, Nike has more control over supply and over the flow of innovative products into the market. The company also benefits from its huge global sales footprint and brand strength. Those competitive assets show up Nike's faster growth and higher gross profit margin, which dipped only slightly last quarter to 44% of sales.
NKE Gross Profit Margin data by YCharts
The gross profit figure should begin rebounding soon because Nike has already reached a healthy inventory level after using targeted price cuts at its outlet locations. "The actions we've taken position us for more profitable growth going forward," CEO John Donohoe recently told investors.
The better deal for investors
Nike shares are trading at an attractive discount today, too. You can buy the stock for 3 times annual revenue, down from a price-to-sales ratio of over 4 in early 2023. Sure, that's nothing close to the dramatic discount available for Foot Locker, which recently suspended its dividend to shore up its cash position. But Nike stock still looks primed to deliver solid returns to investors who hold the stock over the long term. Its sales trends are healthy, and profitability is on track to begin rebounding over the next few quarters.
If you're looking for exposure to the footwear industry's next cyclical upturn, Nike is the stronger, more stable stock to own right now.
