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Foot Locker: So Much For A Recovery


  • Following unimpressive results and outlook, Foot Locker stock is back to trading at late November 2017 levels.
  • FX tailwinds justifying a good bit of the sales growth, weak gross margin, rich opex and a delayed recovery all helped to create bearish sentiment.
  • I believe the odds in sporting goods are stacked in favor of the suppliers who have the ability to market directly to end consumers - think Nike.

The shopping season rally was short-lived. Foot Locker's (NYSE:FL) unimpressive holiday quarter results, a rarity in retail nowadays, have sent the company's stock back into the red for the trailing 15-week period, following the earnings-driven recovery of mid-November 2017.

(Image Credit: Seeking Alpha)

Revenues of $2.21 billion were not high enough to top mildly more optimistic consensus expectations of $2.22 billion, driven by worse-than-expected comps. Meanwhile, EPS of $1.26 beat consensus, but not by much at all. Perhaps driving share price weakness the most was a 2018 outlook that, while not disastrous, pushed hopes for improvement towards the back end of the year.

Not helping to support bullish sentiment were FX tailwinds, without which Foot Locker's sales would have been about two and a half percentage points lower. In addition, gross margin of 31.4% landed a discouraging 240 bps below year-ago levels, reflecting what management has called "a highly promotional marketplace environment." Non-GAAP op margin took an even larger hit, as opex grew at a faster pace than revenues. Lastly, an effective tax rate of only 32.0% contributed to what I calculate to be a six-cent benefit to EPS over 4Q16 levels, which I believe will be discounted by investors as non-operating tailwinds that speak little to the health of the business.

See my summarized, non-GAAP P&L below.

(Source: D.M. Martins Research, using data from company reports)

My takeaways

The results of the holiday quarter seem to be aligned with what I expect to see of Foot Locker: (1) top line challenges that, because of pricing softness, should (2) impact gross margins negatively, along with (3) opex pressures to support sales activity at acceptable levels (including the digital channel). This dynamic does not seem very encouraging to me.

On a more positive note, management's timid optimism over more resilient margins in

Note from the author: I do not own FL in my portfolio because I believe I can generate long-term growth with limited downside risk in a much more efficient way. This is why I built my Storm-Resistant Growth Portfolio. To learn more about it, click here and take advantage of the 14-day free trial.

This article was written by

DM Martins Research profile picture

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (5)

Now its March 14th and the stock has made a decent quiet recovery. Value play stocks are always in demand in this market. jm
Andreas Hopf profile picture

The stock is still far away from its late 2014 price level.
Yes, we cannot expect $FL to be trading in the 60's or 70's today but the upper 40's and 50's will be seen in a few months. Keep an eye on the chart as there has been substantial interest in Foot Locker at these prices. Managers are keen to load up on cheap stock looking for a 15-20% return. jm
rodolfoavalos1 profile picture
High price points on their products is a good reason for the poor performance.. people nowadays prefer lower prices at a reasonable quality. This company at this point could go either way in terms of value play or value trap, need more Qs to see the trend.
Andreas Hopf profile picture
Christmas season sales were indeed disappointing. The strange thing is, in Europe, online sports gear sales did not explode either. So what is happening? Wrong brands? Missing brands? Ever fattening youth no longer looking for footwear and spending elsewhere?
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