FL shares give up recent gains as margins are pressured in promotional environment

Foot Locker Inc. (FL) released its earnings report for the fourth quarter of 2024, providing insights into its financial performance and prospects. The stock is down 12% as its outlook reflected weakness in margins and earnings power as the shoe giant competes in a highly promotional environment. FL pushed its long-term operating margin goals back two years due to the environment. 

The stock is testing its 50-sma ($30.43) for key support. Shares of FL rallied from $30 on February 20 to $35 ahead of its report. The stock has surrendered those gains. Look for a sideways chop in this area until we see reports around consumer health roll out in coming weeks. 

The company reported earnings per share (EPS) of $0.38, surpassing the consensus estimate of $0.32. Revenues for the quarter increased by 2.0% year-over-year to reach $2.38 billion, slightly surpassing expectations of $2.28 billion.

Foot Locker experienced a decrease in comparable sales of 0.7% during the fourth quarter. Factors contributing to this decline include the repositioning of the Champs Sports banner, consumer softness, and changes in vendor mix. Despite this overall decrease, Foot Locker and Kids Foot Locker in North America saw a notable increase in comparable sales of 5.2%.

The company reported a net loss of $389 million for the fourth quarter, a significant decline compared to net income of $19 million in the corresponding period of the previous year. Non-GAAP net income for Q4 2024 was $36 million, compared to $92 million in Q4 2023. Diluted loss per share for the quarter was $4.13, compared to earnings per share of $0.20 in Q4 2023. Non-GAAP earnings per share decreased to $0.38, compared to $0.97 in the prior-year period.

Significant changes were observed in gross margin and selling, general, and administrative (SG&A) expenses. Gross margin declined by 350 basis points, mainly due to higher markdowns, partially offset by occupancy leverage. On the other hand, the SG&A expense rate increased by 10 basis points compared to the prior-year period, primarily due to inflation and investments in front-line wages and technology.

Looking ahead to the fiscal year 2025, Foot Locker issued guidance for EPS in the range of $1.50 to $1.70. It is important to note that this guidance may not be directly comparable to the consensus estimate of $1.86 due to a non-recurring charge of $0.10 included in the EPS guidance. The company also expects revenues for FY25 to increase by approximately 1% compared to the previous year, reaching a range of $8.08 billion to $8.25 billion.

Foot Locker remains committed to its long-term Lace Up plan, expressing confidence in its ability to generate earnings growth. The company reiterated its target of achieving an 8.5% to 9% earnings before interest and tax (EBIT) margin by 2028, as communicated during its March 2023 Investor Day. However, due to a lower starting point at the end of 2023, Foot Locker now anticipates a two-year delay in reaching this goal.

To achieve its financial targets, Foot Locker is undertaking various strategic initiatives. These include plans to return to positive comparable sales growth and EBIT margin expansion during 2024. Additionally, the company aims to reduce its store count by approximately 4% and its total square footage by around 1%. Foot Locker also expects a reduction in licensing revenue by approximately $17 million.

Looking at future projections, Foot Locker presents comprehensive guidance for the full year of 2024. The company expects sales to fluctuate between a decrease of 1% and an increase of 1%, considering the annual headwind of approximately 1% due to the extra week in fiscal year 2023. Comparable sales are anticipated to increase within a range of 1% to 3%. The store count is expected to decrease by approximately 4%, while total square footage is projected to decrease by around 1%.

Gross margin for the year is forecasted to be between 29.8% and 30.0%, with a reduction in markdowns compared to the previous year. The SG&A expense rate is expected to be between 24.4% and 24.6%, reflecting continued investment spending. Depreciation and amortization costs are estimated to range from $210 million to $215 million. The EBIT margin for 2024 is projected to be between 2.8% and 3.2%. Additionally, Foot Locker anticipates a net interest expense of approximately $12 million and a non-GAAP tax rate between 35.0% and 36.0%.

In terms of earnings per share, Foot Locker provides a non-GAAP EPS range of $1.50 to $1.70 for 2024. Moreover, the company estimates adjusted capital expenditures of about $345 million.

Foot Locker's earnings report indicates a mixed performance, with an overall increase in revenue but a decrease in comparable sales. The company acknowledges the challenges it faced during the fourth quarter of 2024, such as consumer softness and changes in the Champs Sports banner. However, it remains confident in its long-term growth potential, citing the Lace Up plan as a driver for future earnings growth. Foot Locker's guidance for fiscal year 2025 reflects its commitment to achieving financial targets and improving key metrics. Investors will be closely monitoring the execution of Foot Locker's strategies and its ability to navigate market conditions in the coming quarters.