It seems apparel business is the retail segment that benefitted the least from the pandemic-driven shopping boom, mainly due to lower spending and the weak back-to-school season. After improving its financial position in the early second half, Foot Locker, Inc. (NYSE: FL) is betting on the holiday season to beat the COVID blues.
Shares of the New York-based athletic footwear retailer are going through a volatile phase. After the short-lived rally that followed last week’s earnings, they have been trading lower. The low valuation and impressive target price should encourage investors to tap the buying opportunity.
Omnichannel Push
Since store footfall is bound to remain weak in the foreseeable future, thanks to the shelter-in-place orders and store closures, retailers are busy ramping up their omnichannel capabilities. Footlocker owes its strong third-quarter results to the continuing efforts to expand the digital platform, with focus on customer-facing technology and data analytics.
Having reopened most of the stores and added new units in recent months, the company is wooing customers by offering an improved shopping experience through facilities like buy-online-pick-up-in-store and buy-online-ship-from-store. While serving customers remotely, the management also expects to generate decent margins.
Permanent Shift
The good news is that the direct-to-consumer push might bring a permanent change to the business model as customers are expected to stick to their new shopping behavior, with the re-emergence of COVID prompting more people to go digital. That opportunity will be complemented by the digital payments solution the company is launching in the US, inspired by the success of similar platforms in other markets. When the holiday season gathers steam next month, more customer-friendly features are expected to be added.
From Foot Locker’s Q3 2020 Earnings Call Transcript:
“What I will tell you, is that while we expect the penetration level to moderate, we don’t expect to go back to pre-COVID percentages. Over the last few years, we have invested in and significantly strengthened our digital foundation. This drove sustained digital traffic growth through Q3, with strong upticks across all banners and geographies. At the same time, we’ve been evolving our organization to be digitally led. We’re committed to great digital product storytelling, and our customers have noticed, how much their experience has improved.”
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But, the ongoing restrictions on sporting events will continue to be a headwind for the company — until normalcy returns. Since an extension of the lockdown in very much on the cards, sales at physical stores would remain weak during the remainder of the year. Going forward, the performance will also depend on how soon schools reopen.
Comps Surge
After contracting in the early months of the fiscal year, Foot Locker’s comparable-store sales increased for the second consecutive quarter but at a slower pace sequentially. Consequently, sales advanced 9% annually to about $2 billion in the third quarter. At $1.21 per share, adjusted earnings were up 7%. Experts had predicted lower revenue and earnings numbers.
“Looking forward, we remain on track to invest roughly $155 million in capital for the full year, in line with our prior guidance. As we think about the coming months and potential for incremental COVID driven lockdown, we believe our strong net cash reserves and credit availability, positions us with ample liquidity to manage through the near-term fluctuations, while continuing to invest in the business,” Lauren Peters, chief financial officer of Foot Locker.
Read management/analysts’ comments on Foot Locker’s Q3 earnings
Though the stock rose after last week’s earnings release, it retreated soon and maintained a downtrend since then. The shares have gained 34% in the past six months and are currently trading at the levels seen at the beginning of the year.