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Foot Locker Stays Optimistic After a Tough Quarter

Demitrios Kalogeropoulos, The Motley Fool

Investors were bracing for bad news from Foot Locker (NYSE: FL) in its second-quarter report. The footwear retailer had posted slowing growth in the previous quarter, and many of its products have been threatened by the trade battles between the U.S. and China. Those skirmishes could raise its costs and force the company to choose between sales growth and profitability.

In its actual results this week, Foot Locker revealed another significant growth slowdown and its profit margins declined. Yet executives left their full-year outlook in place, implying a strong finish to 2019.

More on that 2019 forecast in a moment. First, here's a summary of the latest results:

Metric

Q2 2019

Q2 2018

Change

Revenue

$1.8 billion

$1.8 billion

N/A

Net income

$60 million

$88 million

(32%)

Earnings per share

$0.55

$0.75

(27%)

Data source: Foot Locker's financial filings.

What happened with Foot Locker this quarter?

The retailer's sales came in softer than expected during the seasonally weak quarter and both gross and operating profit margins edged lower. However, a strong inventory position, plus firming demand later in the quarter, convinced CEO Richard Johnson and his team to predict healthy growth in the upcoming back-to-school and holiday shopping periods.

A display of shoes for sale.

A few key highlights of the quarter:

  • Comparable-store sales rose by less than 1% compared to 5% in the previous quarter and 10% at the end of 2018. So far this year, comps are up 2.8%.

  • Gross profitability dipped to 30.1% of sales from 30.2% and selling expenses rose as the retailer spent cash on its e-commerce infrastructure. As a result, operating income fell to $81 million, or 4.6% of sales, from $112 million, or 6.2% of sales. Part of that slump was due to a one-time litigation expense, but profitability still slipped after accounting for that temporary charge.

  • Inventory fell 1% after accounting for currency exchange shifts, putting the company in a flexible position heading into the seasonally strong second half of the year.

  • Foot Locker closed a net 27 stores and operated 3,174 locations by the end of the quarter.

What management had to say

Executives admitted that demand was a bit weak but explained why they remain confident in their full-year targets. "While our results in the second quarter did come in at the low end of our expectations," Johnson said in a press release, "we saw improvement in our performance as we moved through each month of the quarter." The CEO went on to say that "positive momentum exiting the quarter has us well positioned for the back-to-school period and beyond."

Looking forward

Executives predicted more elevated spending in the next few quarters as Foot Locker adjusts to shifting demand toward e-commerce selling channels. They're bullish about their inventory position, though, especially as suppliers like Nike continue to introduce new products at a rapid clip.

These positive trends convinced executives to affirm their 2019 outlook, which calls for sales to rise in the mid-single digits while adjusted earnings expand at a slightly faster rate. That prediction implies significantly faster growth over the next two quarters than investors saw in Q2, and so now it's up to the company to deliver on that aggressive promise.


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Demitrios Kalogeropoulos owns shares of NKE. The Motley Fool owns shares of and recommends NKE. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com