A Look At Whether Or Not Foot Locker Can Maintain Its Positive Momentum

There are questions concerning if Foot Locker can continue its growth momentum.source: Sneaker Freaker

In light of the coronavirus and social unrest that has affected some of its stores, Foot Locker’s (FL) last quarter was surprisingly strong, resulting in the company reinstating it dividend, albeit at a modest $0.15.

In this article we’ll look at some of the variables that will determine if the company will be able to continue moving in an upward trajectory, or if the last quarter was an anomaly that will be difficult to improve upon in the near term.

Latest earnings

In its latest earnings report Foot Locker reported sales of of $2.08 beating, up 17.5 percent, and beating expectations by about $8 million. Earnings per share in the reporting period finished at $0.71, up significantly from the $0.57 analysts were looking for.

Last year in the same quarter the company generated revenue of $1.77 billion, and EPS of $0.66. GAAP EPS came in at $0.43, missing by $0.17. Minus some charges, GAAP EPS would had been $0.55, which would have beat estimates.

Gross margin dropped 420 bps to 25.9 percent, missing expectations of 26.1 percent. Same-store sales for locations opened at least a year were up by 19 percent.

At the end of the quarter the company had inventory valued at $1.19 billion, down 2.7 percent from the same quarter last year.

The company had cash on hand of $1.37 billion at the end of the reporting period, with $121 million in long-term debt. That strong cash position is what triggered the board to reinstate the dividend. Last year in the same quarter Foot Locker had cash and cash equivalents of $939 million.

While generating good quarterly results, the company didn’t provide forward guidance primarily because of ongoing uncertainties associated with COVID-19 and social unrest.

Some concerns

One of the major concerns going forward is the impact the pandemic could have on the company’s performance.

In the last quarter Foot Locker marked down a number of products which resulted in an increase in sales and the drop in inventory levels, but also the decline in gross margins.

There was also the pent-up demand related to the early lock down period, and the money people received from the government. That combination helped Foot Locker to outperform.

That said, there’s no doubt the government is going to cut another check to U.S. consumers, and that could be a positive catalyst depending upon how much business the company gets as schools across the country start to resume classes.

However that works out, there is no doubt sales related to schools opening and the accompanying demand from sports, isn’t going to be as robust as in other years.

This is difficult to measure because school districts in the U.S. have different plans in place to open, along with different time frames.

In the state I live in some county schools are opening for in-home instruction starting in August, but students won’t be going back to school until the latter part of September; this changes from county to county.

If a lot of school districts engage in similar time tables, Foot Locker could get some decent business in the latter part of the current quarter. It could also trigger meaningful sales in the early part of the Christmas shopping season, based upon the assumption there will be more stimulus checks coming.

The direct-to-customer channel jumped by 173 percent in the quarter, with the likelihood that will continue to be a larger percent of the company’s performance going forward. As a percent of overall sales, direct-to-customer sales accounted for 33.2 percent in the reporting period, against the 14.3 percent year-over-year.

A downside to this is that as direct-to-customer becomes a larger part of the product mix, it’ll put downward pressure margins because of the higher costs associated with freight. That, combined with the company stating it’s going to continue to work on selling off current inventory by markdowns, means in the near term gross margins is going to remain under pressure. That will probably improve in the fourth quarter.

Another concern is Foot Locker Europe, where comp sales dropped in the high single-digits. The company said consumers in Europe are more “conservative” in their response to stay-at-home orders. That was especially true concerning products catering to the men’s market.

The reasons why it’s difficult to accurately assess Foot Locker is the same for other businesses, which are dealing with the pandemic and social unrest. I don’t see either of those going away soon, and with uncertainty as to what COVID-19 will look like when cooler weather comes, and the mood of some people who have taken to the street – both peacefully and destructively – it’s impossible to know how deeply both of these factors will play in the months ahead.

That’s especially true with elections coming up in the U.S.

Conclusion

With a solid quarter under its belt in the COVID-19 era, it appears Foot Locker has so far, successfully navigated the pandemic waters. But as mentioned earlier, how much of that is sustainable has yet to be determined.

The questions that need to be answered are: How much was the company’s performance related to pent-up demand from the early lock downs; how deeply will promotional sales and consumers increasing direct-to-customer transactions have on margins; what type of school sales will the company generate in the next couple of quarters; and when will the next stimulus checks get into the hands of American consumers?

Yet to be determined will be whether or not the company will be able to get rid of enough older inventory in order to make way for a significant amount of the new for the Christmas season. Also, will the new inventory be a significant catalyst in the last quarter?

If pent-up demand isn’t as big of an issue as I think it was in the reporting period, Foot Locker could surprise to the upside once again in the next two quarters.

On the other hand, if was did play a big part in its performance, it’s going to be difficult to continue to boost its numbers under the current pandemic and social scenarios.

The bottom line for me is even though the quarter was a good one, investors will have to be cautious with the offsetting positive and negative catalysts as to whether or not Foot Locker can continue to grow under these conditions.

I think it can continue to do fairly well for the next couple of quarters, but margin and earnings will remain a challenge.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Credit: SeekingAlpha

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