Foot Locker beats expectations but stock tumbles as closures and valuation weigh on sentiment
Foot Locker (FL) reported its Q2 2024 earnings, showing a mixed performance compared to analyst expectations. The company achieved total sales of $1.90 billion, a 1.9% year-over-year increase, slightly surpassing the analyst estimate of $1.88 billion. On the earnings front, Foot Locker posted an adjusted loss per share of $0.05, which was better than the anticipated loss of $0.07 per share but still a decline from the $0.04 earnings per share reported in the same quarter last year. Despite the sales growth, the company’s results were weighed down by ongoing operational challenges and investments.
Comparable sales, a key retail metric, grew by 2.6%, well above the expected 0.99% increase and marking a significant improvement from the 9.4% decline seen in the same period last year. This growth was driven by strong performance in the global Foot Locker and Kids Foot Locker banners, which saw comps rise by 5.2%. However, the company’s gross margin expansion of 50 basis points year-over-year, while positive, was partially offset by a 130 basis point increase in SG&A expenses as a percentage of sales. These higher expenses were primarily due to investments in technology, brand-building efforts, and inflationary pressures.
Foot Locker reaffirmed its full-year 2024 guidance, maintaining its adjusted EPS outlook of $1.50 to $1.70, with comparable sales expected to grow between 1% and 3%. The company also guided for total sales to range from a 1% decline to a 1% increase. However, it revised its gross margin guidance slightly lower, now expecting a margin of 29.5% to 29.7%, down from the previous forecast of 29.8% to 30%. The guidance on capital expenditures was also reduced to $275 million, down from the prior estimate of $345 million.
Despite the overall positive sales momentum, Foot Locker’s stock experienced significant pressure, dropping 10% in pre-market trading. This decline was likely driven by concerns over the high valuation, as Foot Locker’s forward P/E ratio is now at 20, which is considered expensive for the retail sector. Additionally, the company's decision to close stores and e-commerce operations in South Korea and several European countries, including Denmark, Norway, and Sweden, added to the negative sentiment. These closures are part of a broader strategy to streamline international operations and focus on core markets.
The company’s management, led by CEO Mary Dillon, expressed confidence in the ongoing "Lace Up Plan," highlighting that the positive trends in sales and margins demonstrate the plan's effectiveness. Dillon emphasized the strong start to the Back-to-School season and the stabilization of the Champs Sports banner as positive signs. However, she acknowledged the need for continued simplification of operations and better execution of strategic initiatives, including the relocation of Foot Locker’s headquarters to St. Petersburg, Florida, which is expected to reduce operating expenses in 2025.
In summary, Foot Locker's Q2 results reflect a company in transition, with some encouraging signs of improvement but also significant challenges ahead. While the comp sales beat and maintained guidance are positive, the stock’s steep decline indicates investor concerns about the high valuation and the company's ability to navigate the competitive retail landscape. The upcoming quarters will be critical for Foot Locker as it seeks to fully realize the benefits of its strategic initiatives while managing the complexities of the current retail environment.