Foot Locker FL shares drop 25% on Q1 earnings, lower forecast

A sign hangs above the entrance to a Foot Locker store on August 02, 2021 in Chicago, Illinois.

Scott Olson | Getty Images

Foot Locker Shares fell more than 27% on Friday after a worse-than-expected slowdown in consumption led to a double-digit sales slump, prompting the company to cut its outlook just two months after its IPO.

Following a string of earnings above expectations from major retailers like Target, TJ Maxx And walmart this week, Foot Locker’s poor report could signal trouble ahead for other names in the industry, as a slew of companies report earnings over the coming weeks.

Foot Locker missed both the high and the low and said it needed to aggressively promote merchandise to eliminate high inventory levels and convince shoppers to use their discretionary money for shoes and apparel.

Here’s how the sportswear retailer did in its first fiscal quarter compared to what Wall Street expected, based on a survey of Refinitiv analysts:

  • Earnings per share: 70 cents adjusted vs. 81 cents expected
  • Revenue: $1.93 billion vs $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 with about $132 million, or $1.37 per share, a year earlier.

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

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

Foot Locker now expects sales to fall 6.5% to 8% for the year, down from a previous range of 3.5% to 5.5%. He expects comparable sales to fall 7.5% to 9%, from a previous range of 3.5% to 5.5%.

Foot Locker expects non-GAAP earnings per share to be between $2 and $2.25, compared to its previous outlook of $3.35 to $3.65.

The company expects gross margins to be between 28.6% and 28.8%, down from a prior range of 30.8% to 31%.

“Consumer demand, you know, has eased since Investor Day [earlier this year] and you know, the signals are that we think the pressure is going to continue,” CEO Mary Dillon said on a call with analysts. We had hoped things would come back after that and what we’ve seen is that it’s really not to the extent that we had expected or hoped for.”

The company’s buyers, who have middle-to-low incomes, face pressure on discretionary spending from continued inflation of necessities like gas, rent and groceries, Dillon said. She added that the company has seen “an increase in credit utilization” as consumer debt hits a new high in the United States.

During back-to-school and holidays, Foot Locker shoppers “rallyed” but also grew accustomed to higher-than-usual promotions, the company said. Buyers were “resistant” to full pricing in February and, combined with macroeconomic factors, this created “headwinds” for the company’s major mainstream brands, said Frank Bracken, chief commercial officer and executive vice president of Foot Locker.

Foot Locker’s poor report could be a harbinger of what’s to come, especially as retailers like Kohls, american eagle, Abercrombie & Fitch, Ralph Lauren And Gap get ready to declare your income next week.

While major retailers posted better-than-expected earnings this week, 45% of the sector has yet to report, Bank of America’s trading desk noted. Companies that are yet to come are not as high quality as those that reported this week, the bank said.

“I think FL’s comments are punishing the sector today and adding to people’s pre-existing nervousness about the results yet to come over the next few weeks,” the trading desk told clients.

Foot Locker began aggressively promoting merchandise in April to boost sales, but steep discounts – combined with increased retail theft – slashed its margins in the first quarter by four percentage points from the period. last year. The company expects promotions to put pressure on margins in the future.

Other soft goods retailers, or those selling soft goods like apparel and footwear, could also report margin compression in the coming weeks due to increased promotions across the industry to cater to consumers. price-conscious, analysts told CNBC previously.

Nike ‘reset’ contributes to slowing sales

The earnings come 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 “renewed” partnership with Nike – it’s the largest and most important supplier – and said it had spent “a lot of time… revitalising” Foot Locker’s relationship with the sneaker giant since taking over. function.

On Investor Day, the company said Nike will continue to lead its portfolio of brands, accounting for 55-60% of its mix. But on Friday, he said his “reset” with the company had helped slow comparable sales. He also noted a “limited supply” of Nike products, which have long been one of his main sales drivers.

“The mix outside of Nike was 35% this quarter, which is up a few points, so we feel like we’re moving forward and diversifying the brand portfolio,” said Robert Higginbotham, outgoing chief financial officer and vice president. senior of the company. Investor Relations. “We have not given targets for Nike or supplier mix penetration by year. We still expect, over time, by 2026 to reach over 40% in our mix with other suppliers.”

While Nike has long been a crucial part of Foot Locker’s business, at times accounting for the majority of its sales, the sneaker giant is in the midst of its own internal reset. This forced Foot Locker to become less dependent on him.

Nike has called Foot Locker an important partner, but has also spent the past few years building up its direct-to-consumer business and cutting ties with wholesalers. In recent quarters, its wholesale revenue has increased, but that was largely because Nike relied on these partners to eliminate excess inventory.

On an earnings call in March, the company said it expects wholesale revenue to “moderate” in the coming quarters, which could signal even more trouble for Foot Locker.


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