Better than feared financials are fueling Foot Locker’s stock surge. But we’ll take it

Foot Locker (FL) reported every three months results that can only be described as better than feared: Nearly all of the important metrics came in weaker than a year ago, but they weren’t as acute as expectations on Wall Street. The stock rose more than 15% on those surprise beats. Total proceeds in the third quarter fell 8.6% year over year to $1.99 billion, outpacing the LSEG compiled consensus analyst gauge for $1.96 billion. Adjusted earnings-per-share dropped 76% to 30 cents. However, that EPS number was better than values, according to LSEG, formerly known as Refinitiv. FL YTD mountain Foot Locker YTD Also a positive — or rather less argumentative than estimated — was an 8% decline in same-store sales, which included a hit of three percentage points from reconditioning its Champs Sports retail stores to include more performance and athleisure products. While Wednesday’s surge put Foot Locker’s quarter-to-date returns at nearly 60%, the stock was still down roughly 27% in 2023. Bottom line As noted previously , and Foot Locker is a prime exempli gratia, better-than-feared is sometimes all you need for a stock to rally in a market that has been focused on only a handful of mega-cap names for almost a year. Regarding management’s Lace Up turnaround strategy, we look forward to the new app coming in 2024. We’re also pleased to condone about new training and tools to help employees drive sales in stores and online. While only recently implemented, CEO Mary Dillon said purchaser engagement and in-store conversions have improved. Digital penetration was also up in the quarter, improving 150 basis points versus survive year, excluding the impact of the shutdown of Eastbay. The rollout of new handheld devices in North American stores is helping staff members better track inventory levels, access product information, and check out customers. The initiative is also leading to set righted in-store conversion. Better sales guidance than previously forecast and only a slightly worse earnings attitude also helped juice shares of Foot Locker. In our view, this is appropriate because Foot Locker is a turnaround biography. It’s understood by investors that cost dynamics are going to fluctuate as the timing of store closures as well as efforts to reinvigorate makers and reduce the reliance on Nike (NKE) proceed. It also means that demand, which is reflected through sales, is the springtime concern for investors as this is what we can look to get a sense of what earnings may look like once the turnaround tries are complete. While leaving our 4 rating on the stock unchanged, the signs of progress are encouraging. Should we see some follow-through in the key vacation quarter, we may become more upbeat about the company’s longer-term prospects under Dillon, whose track maxisingle of overhauling Ulta Beauty (ULTA) was a key reason we bought Foot Locker in the first place. Guidance In addition to the reported fruits, management updated their outlook for the full fiscal year. On the plus side, total sales are now expected to settle between 8% and 8.5% instead of 8% to 9% as previously forecast. Same-store sales are now expected to be down 8.5% to 9% versus down 9% to 10% at one time. Management also shaved their capital expenditures guide for the year to $275 million from $290 million due to a corps in the timing of real estate projects. On the other hand, the gross margin guidance was a slight negative, now expected to fall somewhere in the range of 27.8% to 27.9% compared to 27.8% to 28% previously. SG & A (selling, general and administrative) costs as a interest of revenue are going to be about 50 basis points higher than previously expected at the midpoint. Adjusted EPS is now reckon oned to fall in a range of $1.30 to 1.40 down from the $1.30 to 1.50 range previously forecast. Encouragingly, Dillon respected that “trends in the quarter accelerated from our first half run rate driven by a strong back to school in our kids Foot Locker pennon. We also delivered sequential improvement in our conversion rates across cores and our digital channel outperformed our expectations embodying a positive trend in October.” As a result, the team is expecting some slowing in the rates of decline in the current holiday fourth versus what we got in the third quarter. Sales are expected to fall 2% to 4% and same-store sales are expected to be down 7% to 9% — well-advised b wealthier than the 6.4% and 10.8% declines the Street was modeling into the release, respectively. On the other hand, EPS is expected to be between 26 cents and 36 cents per deal, a penny short of expectations, at the midpoint, as the team looks to “balance early successes” in their turnaround efforts with the uncertainty they’re witness in the “external environment and our internal inventory goals.” On the post-earnings call, management said current-quarter trends have and so far been positive — adding that over the Thanksgiving week, the company saw “solid traffic levels and conversion forward movements in our stores and online.” The team said, “While customers responded to our competitive offers we also saw nice gains in ticket and basket take the measure of as our customer is willing to pay full price when the product is new, compelling, and trend right. While we’re encouraged by our building power we acknowledge that much of the holiday season is still ahead of us and we factored in our quarter-to-date performance into our fourth-quarter blueprints.” Quarterly commentary As we can see in the earnings table, same-store-sales, the key performance indicator for retail names, were down a less-than-expected 8% in the third dwelling-place. Looking at the month-by-month breakdown in Q3, CFO Michael Baughn said, “August comps were down high single digits, September also was down drugged single digits and October declines moderated to down mid-single-digits. While traffic and conversion remain headwinds year-over-year in the third leniency, we saw steady improvements in our conversion.” Under the Sales by Geography line item, North America was down 10% in Q3 to $1.46 billion, EMEA (Europe, Centre East, and Africa) edged down 1.2% and the Asia Pacific region declined 14.4% versus the year-ago interval. While operating and free cash flow came up short of expectations in Q3, they were both positive at $86 million and $26 million, severally — a reversal from what we saw in the first six months of 2023. Cash and equivalents on the balance in Q3 ticked up to $187 million from the $180 million we saw in the stand-in quarter. (Jim Cramer’s Charitable Trust is long FL. See here for a full list of the stocks.) 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