Foot Locker saw stock downgrades from Citi and Williams Trading on Monday following its first-quarter miss and move to significantly reduce its full-year guidance. Some analysts were still hopeful that improved Nike allocations and benefits from its new Lace Up transformation plan would eventually pay dividends.
Shares of Foot Locker fell $11.31, or 27 percent, to $30.21 on Friday following the report’s release. On Monday, shares lost another $2.75, or 9.1 percent, to $27.45. Nike fell 3.99 percent on Monday after declining 3.5 percent on Friday.
Highlights of the report include:
- Revenue in the first quarter was down 11 percent to $1.93 billion, below Wall Street’s consensus of $1.99 billion. Comps were down 9.1 percent, below the consensus of 7.7 percent. The shortfall was attributed to the macro-climate, lower income tax refunds, vendor mix, and the ongoing repositioning of the company’s Champs Sports banner.
- EPS in the first quarter EPS of 70 cents came in below the consensus of 76 cents. Gross margins were down 400 basis points to 30.0, below Wall Street’s consensus target of 31.2 percent. The lower margins were driven by elevated markdown levels, occupancy deleverage, and an increase in shrink.
- Inventory closed the quarter up 26 percent year over year only slightly better than the positive 30 percent at the close of the fourth quarter and well ahead of the sales trend.
- Full-year FY revenue growth is now projected to be down 6.5 percent to 8.0 percent year over year versus 3.5 percent to 5.5 percent prior and comp growth to decline between 7.5 percent to 9.0 percent compared to down 3.5 percent to 5.5 percent prior. Gross margin is projected to be in the range of 28.6 percent to 28.8 percent versus 30.8 percent to 31.0 percent previously and adjusted EPS in the range of $2.00 to $2.25, down from $3.35 to $3.65 under previous guidance.
Citi lowered its rating on Foot Locker to “Neutral” from “Buy” and its price target to $30 from $48.
Paul Lejuez wrote, “When we upgraded FL shares from Neutral to Buy on 3/21, we were drawn to FL’s “self-help” story led by a seasoned retail executive who had stabilized the NKE relationship and had plans to expand with other fast-growing brands. What we failed to appreciate was: (1) The economic sensitivity of FL’s customer base, particularly at a time when consumer spending is slowing; (2) How disruptive mgmt’s plans are to the business during a time when the consumer is already price sensitive/tightening their wallet; and (3) How unhealthy the athletic market is in the US. 1Q results brought these issues to the forefront and highlighted how low mgmt’s visibility is into trends in their business. We note that while F23 guidance was lowered significantly, we don’t view it as fully de-risked.”
Williams Trading downgraded Foot Locker to “Sell” from “Hold” and its price target to $25 from $38.
Sam Poser wrote, “The guidance cut, which builds in some improvements from current trends late this year, will likely still prove too aggressive, especially when it comes to gross margin, given bloated inventory levels. 1Q23 inventory is up 25.5 percent YoY, on 1Q23 sales decrease of 11.2 percent. On a sequential basis, inventory is up 7 percent vs. 4Q23, and sales are down 17.4 percent. FL cannot manage well after losing so much marquee Nike product.”
On product, Poser wrote that Foot Locker’s loss of “a great deal of Nike marquee, high ticket, and fast turning footwear that sells out at full price, has been replaced with decent product from other brands that has a much slower rate of sale and is not as compelling. The available open-to-buy from the loss of so much Nike product appears to have been used in a ‘let’s throw new stuff against the wall, and see what sticks’ manner. Vendors are supporting FL because FL has a big pencil. Just because FL is adding a number of new brands, and expanding business with existing brands, does not mean that the customer will care at the end of the day.”
Poser also feels that the overall fashion athletic footwear is being impacted by consumers over-loading on sneaker purchases during the pandemic. He added that Foot Locker should benefit from the strength being seen by New Balance but noted that it’s still uncertain to what degree Hoka and On will resonate with Foot Locker’s customer. Poser wrote, “The running category, other than from New Balance, Hoka, and On, is dead, game basketball shoes are seasonal, so there’s little for FL to get excited about. Further, there are no shoes from any brand that can sell through tens of thousands of shoes, over $180 at retail, at full price, the way Jordan Retros do.”
Jefferies maintained its “Buy” rating while lowering its price target to $37 from $47.
Analyst Corey Tarlowe cited the below-plan revenue and margin performance in the quarter, still elevated inventories and revised 2023 guidance among the negatives on the quarterly report. Among the positives, he cited the hiring of Mike Baughn, formerly at Kohl’s, as EVP and CFO. Also encouraging was Foot Locker’s management’s increasing confidence in the stabilization of the Nike business by year-end with growth returning in 2024.
Tarlowe wrote in his investor thesis, “With a healthy balance sheet, strong relationships with key suppliers, and new product offerings through private label and collaborations with other brands, we see FL benefiting from the general strength in the athletic footwear and apparel space.”
BTIG kept its “Buy” rating but lowered its price target to $42 from $53.
Janine Stichter wrote that while “the macro backdrop appears to be taking an outsized toll on FL’s lower-income customer base,” transformation initiatives launched by CEO Mary Dillon remain on track, including (1) enhancing the strategic relationship with Nike; expanding new brands including On and Hoka; mixing into new formats and off-mall locations, which continued to outperform; growing loyalty, with a pilot of the new program on track to launch in Canada later this year; expanding digital to 25 percent from about 16 percent currently; and cost optimization.
Stichter wrote, “While ’23 was already deemed a reset year, the macro backdrop means FL will be starting from a lower base than anticipated as it pushes toward its medium-term target of $9.5B in revs/8.5 percent-9 percent op margins (>$6 in EPS). Near-term, we believe performance will be more a function of the broader environment than management’s execution, although we were pleased to see greater flex on SG&A than we had expected. Still, we see opportunity into ’24 as macro stabilizes and initiatives, which appear to be making steady progress, bear fruit. We lower our price target to $42 on our reduced estimates and slightly lower multiple but reiterate our Buy rating.”
Evercore reiterated its “Outperform” rating and lowered its price target to $45 from $60.
In a note, Warren Cheng called the 27 percent share loss on Friday “an appropriate reaction for what was a major collapse in sell-through trends in April/May.” He feels the quick downturn in sales shows Foot Locker is facing “outsized exposure to some of the most challenged parts of the market,” including low-income households, weakness in apparel due to elevated inventories in the marketplace, and weak trends at Vans, marquee running and boots.
The key, according to Cheng, is whether the sales slowdown impacts Foot Locker’s ability to execute on its transformation plan laid out at its March 20th Investor Day and Cheng believes that won’t likely be known until the end of the year. He still likes the deemphasis on Champs Sports which faces more competition versus the flagship Foot Locker chain.
He also saw the continued expansion of On and Hoka across banners as a “positive sign for the ability to win in the new Sneaker Lifestyle-centric (rather than sneaker drop-centric) model.” Finally, ht saw the continued success of Foot Locker’s experiential Community and Power stores as encouraging because both concepts would be hard for brands to replicate.
Cheng’s concerns include Kids Foot Locker, which was down 8 percent in same-store sales in the quarter, and whether Foot Locker was losing its position as the preferred channel for brands to drop lifestyle sneakers. Cheng wrote, “We’ve noticed that FL still getting differentiated allocations of streetwear franchises like Dunks, AF1s, Max Airs, etc… even as team sports, running, Jordans, and other hype-drop allocations have pulled away from FL.”
Deutsche Bank maintained its “Hold” rating and reduced its price target to $28 from $42.
Analyst Gabriella Carbone wrote, “We think investor sentiment is likely to remain in the negative camp until FL’s inventory position improves (up 26 percent at the end of 2Q) and there is better visibility around underlying sales trends. In addition, changes in the company’s vendor mix are likely to keep investors concerned. In our view, it is hard to determine whether the company has set the bar low enough given elevated inventories and uncertainty around demand.”
Goldman Sachs reiterated its “Neutral” rating and lowered its price target from $37 to $29.
Kate McShane wrote in a note, “We remain Neutral on Foot Locker, despite near term headwinds impacting FL’s customer base amidst a difficult macro backdrop. On new CEO Mary Dillon’s strategy, we continue to look forward to seeing the improvements in top line growth from better definition of the banners, the lift from the company’s revamped loyalty program, and its more urgent address of moving more of the real estate portfolio off mall over time.”
Baird kept its “Neutral” rating and reduced its price target to #32 from $40.
Jonathan Komp wrote in a note, “’s investor meeting in March highlighted an enhanced focus under CEO Mary Dillon behind growing sneaker share, differentiating product and banners, elevating digital/loyalty, and driving profitable growth. While the plans reinforce investor confidence in F2024-2026E earnings potential, challenges tied to the expected Nike reduction (while broader relationship “revitalized”), addressing lower-profit sales (Champs/malls/international), and navigating an uncertain economic backdrop (softer conditions embedded in our model) highlight near-term risks during a reset year in F2023E. Accordingly, we are staying patient with our positioning given potential additional macroeconomic risks, though following the stock’s >25 percent pullback, also see an improving multi-year risk-reward for patient inevestors.”
Photo courtesy Foot Locker