Earnings preview: Mixed market sentiment ahead of Foot Locker earnings

Of late, there have been indications that the sportswear industry is on a recovery path after several months of lackluster activity, with both retailers and manufacturers bringing innovation into their operations and product portfolio. When New York-based Foot Locker (FL) reports its second-quarter results Friday before the market opens, investors will be looking for updates on the company’s turnaround plan.

Wall Street expects Foot Locker to report earnings of $0.70 per share for the June quarter, with comparable store sales forecast to grow 0.8%. There are concerns that the on-going direct-to-customer shift by vendors, mainly involving online platforms, will continue to drag profitability. The lion’s share of Foot Locker’s revenue comes from products supplied by big companies like Nike (NKE), Under Armour (UAA) and Skechers (SKX).

According to market watchers, vendors who are also suffering from the industry-wide slump find it convenient to push new products through their own channels, considering the rapid adoption of e-commerce by youngsters who constitute the majority of the customers. Meanwhile, the more bullish among the analysts predict earnings per share of $0.72.

There are concerns that the ongoing direct-to-customer shift by vendors will continue to drag profitability

For the first quarter, Foot Locker reported better-than-expected earnings and revenues which were slightly higher compared to the year-ago quarter. However, the muted growth and shrinking margins signal that expectations for a full-fledged recovery in the near term would be far-fetched. Comparable store sales remained in the negative territory in the first quarter.

Experts believe that retailers like Foot Locker need to adopt aggressive measures including price reduction and promotional programs to attract more customers to their stores. Meanwhile, the growing demand for new products launched by manufacturers, especially in the premium category, and the favorable inventory position are expected to drive the company’s profitability.

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Dick Sporting Goods (DKS), another leading player in the sector, is scheduled to report results for its most recent quarter on August 29.

Over the past few years, Foot Locker shares mostly underperformed the market amid investor concerns over its muted earnings performance. The stock, which made some modest gains since the beginning of the year, dropped slightly after the market opened Wednesday. Shares of Foot Locker have gained 11% so far in 2018 and 57% in the past one year.

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