Holding club Foot Locker (FL) announced disappointing results and guidance for the first quarter of fiscal 2023 before the opening bell on Friday. A need to flush out high inventories weighed on the numbers and the stock. Total revenue fell 11% year-over-year to $1.93 billion, missing analysts’ forecast for $1.99 billion, according to estimates compiled by Refinitiv. Adjusted EPS (earnings per share) fell 56% to 70 cents, also below estimates. Analysts expected EPS of 81 cents in the fiscal first quarter. Net income This is clearly not the result we were looking for. We expected the quarter to be weak and previously said it was too early to see activity turn around. However, we are surprised by the magnitude of the reset. That said, as we reported earlier on Friday, this seems to be the “kitchen sink” neighborhood. So we’re keeping our small position in the name for now despite losing more than 25% of the stock on Friday. The reported headwinds were a combination of a concerted effort to reduce Foot Locker’s reliance on Nike; a 10% drop in tax refunds to American workers; and the closure of the Eastbay brand. Foot Locker, which announced the closure of Eastbay in December, will focus on its namesake and Champs stores. Unfortunately, the rebound from these headwinds also turned out to be weaker than management expected. After a strong holiday season, the team said it’s seen the consumer “fall back,” due to high inflation squeezing discretionary budgets and a redirection of remaining discretionary dollars toward services and away from goods. Due to these issues and the company’s declining outlook, we have reduced our Club price target on the stock to $36 from $45. Our new price target reflects approximately 16 times management’s updated earnings forecast, which we believe will prove to be bottoming out in earnings as CEO Mary Dillon’s “Lace Up” strategy takes hold in 2024. While disappointed, we believe management’s turnaround strategy will transform the business into a more efficient business, with greater customer loyalty, a better omnichannel experience and improved profitability over time. Make no mistake, the short term is in question. However, the full benefits of this strategy should become clearer as the operating environment improves. When starting a position at Foot Locker in March, we knew the business would not be fixed soon. But, we trusted then and still trust that Dillion, who has done a great job as CEO of Ulta Beauty, would bring his magic touch to Foot Locker. FL YTD mountain Foot Locker YTD performance Guidance Management said it lowered its full-year guidance as weakness in April at the end of the quarter and in May forced Foot Locker to more aggressively cut items in an effort to reduce stocks. This increased promotional activity is expected to continue throughout the rest of the year. The team now expects FY2023 sales to be down 6.5% to 8% (compared to a decline of 3.5% to 5.5% previously), well below the 4.6% decline that analysts had modeled. Full-year Adjusted EPS guidance was also revised down to a range of $2-$2.25 (from $3.35-$3.65 previously), well below $3.46. expected. For the full year, same-store sales are also expected to decline 7.5% to 9%, with gross margin declining to a range of 28.6% to 28.8%. Selling, general and administrative (SG&A) expense as a percentage of revenue is slightly better than expected at 22.4% to 22.6%. Quarterly Commentary Foot Locker’s fiscal first quarter gross margin performance took a hit – down to 30% from 34% a year ago and below estimates – due to merchandise markdowns and a increase in what is known in retail as shrinkage, which means shoplifting. The theft accounted for 250 basis points, or 2.5 percentage points, of gross margin contraction. Lower occupancies made up the remaining year-over-year gross margin decline of 400 basis points, as shown in the table above. Comparable store sales fell 9.1% in the first fiscal quarter; a much steeper drop than the 7.7% decline that had been forecast. (Jim Cramer’s Charitable Trust is long FL. See here for a full stock list.) As a CNBC Investing Club subscriber with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, AS WELL AS OUR DISCLAIMER. NO OBLIGATION OR FIDUCIARY DUTY EXISTS, OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR PROFITS ARE GUARANTEED.
Shoppers and pedestrians walk past a Foot Locker store on Third Street Promenade in Santa Monica, California.
Patrick T. Fallon | Bloomberg | Getty Images
club outfit Foot locker (FL) announced disappointing results and guidance for the first quarter of fiscal 2023 before the opening bell on Friday. A need to flush out high inventories weighed on the numbers and the stock.
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