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Earnings Preview: Foot Locker to continue the momentum in Q1 despite tough retail landscape

Foot Locker (FL) is scheduled to release its first-quarter results on Friday before the bell. The retailer declared a dividend of $0.38 per share yesterday, up 10% over last year as part of its capital deployment plan announced in February.

In 2019, the stock has risen modestly about 5.5% but analysts are more upbeat about the retailer with a 12-month target price of $71, up about 27% from today’s price of $56.

J.C. Penney, Kohl’s, Nordstrom, Lowe’s and Home Depot this week reported disappointing comp-store sales due to lower mall traffic, increased competition from e-commerce players like Amazon, and changing consumer habits. In addition, investors are worried about the increased tariffs on goods imported from China, which could further dent their earnings which are already on the downhill.

Foot Locker quarterly comparable sales trend Q4 2018

It’s worth noting that most of the Foot Locker stores are located in malls, hence any decrease in footfalls would impact earnings. It would be interesting to see whether the retailer is able to write a different script compared to its peers. For the first quarter, analysts expect revenue to grow 4% to $2.11 billion and adjusted EPS of $1.61, an increase of 11% over last year.

Last year, the footwear retailer bought 90% of its goods from five suppliers. The most important thing to note here is that about 66% of goods were purchased from Nike (NKE). Since there is significant dependence on Nike, there might be ripple effects on Foot Locker due to the increased tariffs on Chinese imports. It would be interesting to see how the retailer is going to source its goods from Nike to avoid any tariff impacts.

Foot Locker has been able to grow its comp-store sales growth consistently over the past three quarters despite multiple headwinds plaguing the industry. The most important metric watched by the street on Friday is whether the retailer continues the momentum from the last quarter.

Last year, the company has been able to increase its sales per square foot by 2% to $504, compared to $495 in 2017. But this is still below 2016’s level of $515. However, it has set a target of increasing sales to $525-575 range per square feet by 2023.

The company expects same-store sales to grow in the mid-single digits, which is going to be a tailwind for the firm compared to its peers. In addition, the increase in digital sales and new product launches along with reduced markdowns could augur well in fiscal 2019.

Looking Back

In the previous quarter, Foot Locker’s stock rose 13% backed by the strong comp-store sales growth of 9.7%. Sales increased 2.8% to $2.27 billion while adjusted earnings were up 37% to $1.56 per share. Q4 results came in better-than-expected on both the top and bottom line numbers. The retailer also announced its plans to spend $275 million this year in improving the store fleet and enhancing the digital initiatives.

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