Foot Locker (FL +0.00%) has fallen more than 60% from its 52-week high as the last two earnings reports and a dividend suspension sent discouraged investors fleeing. The sell-off has taken the stock to lows last seen in 2010, leaving investors wondering what to do next. Are the recent lows a reason to buy Foot Locker stock at a bargain price, or is the company so troubled that investors should assume it's cheap for a reason?
NYSE: FL
Key Data Points
Foot Locker's financials
In the first half of 2023, Foot Locker reported $3.8 billion in sales, a decline of 11% from the same period in 2022. CEO Mary Dillon blamed shoppers who were "cautious with their discretionary dollars." In the most recent quarter, comparable store sales fell by more than 9% year over year.
The lower sales have left the company with a negligible operational profit. For this reason, net income for the first two quarters of 2023 fell to $31 million versus $227 million in the year-ago period. That also included a $5 million loss in the second quarter.
Foot Locker expects the pain to continue as it forecasts a sales decline between 8% and 9% in 2023. This is a downward revision from the previously forecast decline of between 6.5% and 8%.
Additionally, the company decided to "pause" its dividend. While that should save it about $150 million annually, it will deprive shareholders of the $1.60 per share in dividend income they earned until recently.
Due to the recent performance, the price-to-earnings (P/E) ratio now stands at around 12. While that is a low valuation, Foot Locker stock remains more expensive than such peers as Dick's Sporting Goods and Academy Sports and Outdoors. So the shares could slide further.
Business challenges
The competition highlights the lack of a competitive advantage for Foot Locker. Numerous retailers sell athletic shoes, and the aforementioned Dick's and Academy sell shoes along with many other types of athletic gear.
Moreover, it is unclear whether the "lace up" plan to transform the company will build an economic moat. The concept includes:
- An emphasis on creating a "sneaker culture"
- An emphasis on its omnichannel
- A closer relationship with customers
- More non-mall locations
However, almost every retailer has built an omnichannel presence, and a "sneaker culture" could also lead customers to Foot Locker's competitors. The plan to leave malls could also backfire. Off-mall stores, which it expects will make up more than half of all Foot Locker locations by 2026, will offer "elevated experiences," community focus, and product presentations in larger stores.
Nonetheless, the company seems to have ignored the more successful retail concepts that have become popular in recent years. Foot Locker is not explicitly trying to become the Floor & Decor of shoes even though the hard flooring company has succeeded in an established, low-growth business by offering a wider selection at lower prices.
Foot Locker is also not pursuing "stores within stores" with a Nike or an Adidas. This is notable since Target has drawn foot traffic by inviting Ulta Beauty into many of its locations. The Samsung and Apple stores within Best Buy have also given customers a reason to visit, implying that such a concept could also work for Foot Locker.
Avoid Foot Locker stock
Investors should refrain from buying Foot Locker stock despite the low valuation and massively discounted price. The "low valuation" does not compare well to stores offering wider varieties of items from more desirable retail locations. Moreover, the "lace up" initiative appears to leave Foot Locker in a bind by not creating a clear competitive advantage. Unless such a competitive moat appears, investors should probably stay away from this retail stock.
