Foot Locker Misses Expectations in Third Quarter

| About: Foot Locker, (FL)

Foot Locker Inc. (NYSE:FL) swung to a GAAP net loss of $6 million during its fiscal 2009 third quarter, from a GAAP net income of $24 million in the year-ago period. The quarterly result included a $22 million impairment charge associated with the company’s long-lived assets in the U.S. Excluding the charge, earnings per share came in at 10 cents, missing the Zacks Consensus Estimate by 23%, or 3 cents.

The company posted a 7.3% decline in net sales to $1.2 billion during the quarter, compared to $1.3 billion in the year-ago period. The decline was primarily caused by an 8.2% reduction in same-store sales, a key performance metric for retailers, coupled with the closure of 113 stores in the last one-year period.

Foot Locker’s quarterly gross profit dipped by 7.3% year over year to $329 million, while gross margin remained essentially flat at 27.1%. The flat margin was primarily the result of a 90 basis point (bps) increase in merchandise margin, fully offset by a 90 bps decrease caused by the deleveraging impact of buying and occupancy costs on lower sales.

Selling, general and administrative (SG&A) expenses reduced by 4.5% year over year to $274 million mainly due to favorable foreign currency translations, while depreciation decreased by 9.4% to $29 million due to asset write-downs undertaken last year. Nevertheless, operating income, defined as sales less cost of goods sold, SG&A and depreciation, plunged 27.8% year over year to $26 million, while operating margin dipped by 60 bps to 2.1% as expense reductions were not sufficient to offset sluggish sales.

Foot Locker ended the quarter with cash, cash equivalents and short-term investments of $438 million and $138 million in long-term debt, compared to $400 million of cash and $128 million in long-term debt in the prior-year quarter. Merchandise inventories at the end of the quarter were $1.2 billion, a reduction of 2.7% from $1.3 billion last year.

Looking ahead, the company plans to incur approximately $100 million towards capital expenditure in fiscal 2009. Foot Locker also stated that it plans to open 40 new stores, remodel or relocate 150 and close 200 underperforming stores during the entire fiscal year.

Taking cognizance of Foot Locker’s disappointing quarterly performance, Standard & Poor's Ratings Services lowered the company’s corporate credit rating by a notch to B+ with a stable outlook from BB- earlier. The agency stated that the stable outlook indicates that performance and credit metrics of Foot Locker are expected to deteriorate further over the near term.

Meanwhile, the Zacks Consensus Estimate on the company’s earnings for the fiscal year ending January 2010 is currently pegged at 57 cents per share, which moved down by 2 cents in just the past week as 3 of 13 covering analysts lowered projections. The most accurate estimate is even more bearish at 56 cents per share.