Foot Locker FL stock drops 25% Q1 earnings miss, lower guidance

Foot Locker FL stock drops 25% Q1 earnings miss, lower guidance

A sign hangs over the entrance of a Foot Locker store in Chicago, Illinois on August 2, 2021.

Scott Olson | Getty Images

Foot Lockers The stock tumbled more than 27% on Friday after a stronger-than-expected consumer slowdown led to a double-digit drop in sales, prompting the company to lower its outlook just two months after launch.

After a string of better-than-expected gains from major retailers like Goal, TJ Maxx And Walmart this week, Foot Locker’s poor report could indicate that other names in the industry are in for trouble as a number of companies announce earnings over the next few weeks.

Foot Locker fell short on both sales and profits and said the company had to advertise the goods aggressively to replenish high inventories and convince shoppers to spend their discretionary money on shoes and clothing.

That’s how it works at the sportswear retailer performed versus Wall Street expectations for the fiscal first quarter, based on an analyst poll by Refinitiv:

  • Earnings per share: 70 cents adjusted vs. 81 cents expected
  • Revenue: $1.93 billion versus $1.99 billion expected

The company’s reported net income for the three-month period ended April 29 was $36 million, or 38 cents per share, compared to about $132 million, or $1.37 per share, a year ago.

Revenue fell to $1.93 billion, down 11.4% from $2.18 billion a year earlier.

Shares closed 27% lower on Friday, giving the company a market cap of $2.82 billion.

Foot Locker now expects sales to decline 6.5% to 8% for the year, compared to a previous decline of 3.5% to 5.5%. Comparable revenue is expected to decline by 7.5% to 9%, compared to a prior decline of 3.5% to 5.5%.

Foot Locker expects non-GAAP earnings per share to be in the range of $2 to $2.25, compared to the previous guidance of $3.35 to $3.65.

The company expects gross margins to come in between 28.6% and 28.8%, compared to a previous range of 30.8% to 31%.

“As you know, consumer demand has declined since Investor Day [earlier this year] And you know there are signs that we believe the pressure will continue,” CEO Mary Dillon said during an analyst call. “However, when we started this year, we knew there was some pressure due to the reduced tax refund. We had hoped things would bounce back after that and what we saw was that it actually wasn’t to the extent that we had predicted or hoped for.”

The company’s customers, who are predominantly middle-to-low-income, are under pressure to make discretionary spending due to ongoing inflation in household necessities like gas, rent and groceries, Dillon said. She added that the company has seen “an increase in credit usage” as US consumer debt hit a new high

Back in school and during the holidays, Foot Locker shoppers “recovered,” but also got used to higher-than-usual sales, the company says. Shoppers are “resistant” to February’s full pricing and combined with macroeconomic factors, this has created “headwinds” for the company’s key running brands, said Frank Bracken, Foot Locker’s chief commercial officer and executive vice president.

Foot Locker’s poor report could be a harbinger of what’s to come, particularly from a retail perspective cabbage, american eagle, Abercrombie & Fitch, Ralph Lauren And gap Get ready to report your winnings next week.

While key retailers reported better-than-expected earnings this week, 45% of the sector is yet to report, Bank of America’s trading department noted. The companies yet to come are not as valuable as those reporting this week, the bank said.

“I think the FL comment today is punishing the sector and adding to people’s already existing nervousness about the results to come in the next few weeks,” the trading desk told clients.

Foot Locker began aggressively promoting its merchandise in April to boost sales, but deep discounts — combined with a rise in retail theft — squeezed its margins four percentage points in the first quarter compared to the year-ago period. The company expects promotions to squeeze margins going forward.

Other soft-line retailers, or those that sell soft goods like apparel and shoes, could also report margin pressures in the coming weeks as promotions ramp up across the industry to appeal to price-conscious consumers, analysts previously told CNBC.

Nike’s “reset” contributes to slow sales

The win comes eight months into Dillon’s tenure at Foot Locker and just two months after she unveiled the company’s new strategy at an upbeat investor day in March.

Dillon touted the company’s “renewed” partnership with Nike — the company’s best-known and largest supplier — and said she’s “spent a tremendous amount of time reinvigorating Foot Locker’s relationship with the sneaker giant” since the acquisition.

During Investor Day, the company said Nike will continue to lead its portfolio of brands, accounting for 55% to 60% of its mix. But on Friday it said the “reset” with the deal helped slow comparable sales. It also noted a “limited supply” of Nike products, which have long been one of the company’s biggest revenue drivers.

“The mix outside of Nike was 35% this quarter, up a few points, so we feel like we’re making progress and diversifying the brand portfolio,” said Robert Higginbotham, the outgoing CFO and senior vice president of the company investor relations. “We did not provide targets for Nike or vendor mix penetration per year. We still anticipate that over time, by 2026, we will reach over 40% share in our mix with other vendors.”

While Nike has long been an important part of Foot Locker’s business and at times accounts for the bulk of its sales, the sneaker giant is in the process of its own internal realignment. It has forced Foot Locker to rely less on it.

Nike has cited Foot Locker as a key partner, but has also expanded its direct-to-consumer business and shed relationships with wholesalers in recent years. In recent quarters, wholesale sales rose, but that was largely because Nike relied on these partners to shed excess inventory.

During an earnings call in March, the company said it expects wholesale sales to experience a “downturn” in the next few quarters, which could portend even more trouble for Foot Locker.