Key takeaways from Foot Locker’s (FL) Q1 2023 earnings

Positive earnings results from leading retailers recently brought optimism about the industry’s future prospects, but the lackluster performance by Foot Locker, Inc. (NYSE: FL) has dampened the sentiment to some extent. Economic uncertainties and weak consumer confidence have impacted sales in recent quarters as people cut down on discretionary spending, concerned about the high inflation and pressure on personal finance.

Last week, investors punished the athletic apparel retailer for its unimpressive first-quarter results and guidance-cut. The stock suffered a 28% fall soon after the announcement, raising concerns about the health of the retail segment the company belongs to. While FL will most likely bounce back to the pre-earnings levels in the coming months, the underlying weakness calls for caution. The outlook on the stock for the next twelve months is mixed. On the positive side, it offers a high dividend yield of more than 5%, which is well above the S&P 500 average.

The Strategy

The company’s leadership bets on the recently launched Lace Up strategy — which involves relaunching the brand and streamlining the real estate footprint — to set the backdrop for achieving the goal of returning to sustainable growth by next year. However, the slump in customer demand will likely continue this year, while margins are expected to Ramin under pressure. One of the reasons for the sales decline is a drop in product supply from Nike, Foot Locker’s main vendor and a key contributor to its sales. Nike has been aggressively shifting to the direct-to-customer model, lately.

From Foot Locker’s Q1 2023 earnings conference call:

“Coming off the recent launch of our Lace Up Strategy at our Investor Day in March, we are making early progress in building a strong foundation to return to sustainable growth beyond this year. However, our sales have since softened meaningfully given the tough macroeconomic backdrop, causing us to reduce our guidance for the year as we take more aggressive markdowns to both drive demand and manage inventory.”

Results Miss

Adjusted profit missed Wall Street’s estimates for the first time in about three years. Earnings also declined 56% to $0.70 per share in the April quarter. Net income, including one-off items, was $36 million or $0.38 per share, compared to $133 million or $1.37 per share last year. At $1.93 billion, revenues were down 11% from the prior-year period and below the consensus estimates. Comparable store sales dropped a dismal 9.1%, reversing the positive momentum seen in the prior two quarters.

The company attributed the 400-basis points fall in gross margins to aggressive promotions, and an increase in theft-related shrink. The company has been trying to grow demand and clear inventories through discounts and promotional activities. It is worth noting that, the store count declined constantly in recent quarters as the company added fewer units than it closed.

Weak Guidance

Taking a cue from the weak first-quarter outcome, the management lowered the full-year sales and earnings guidance. The top line is expected to decline 6.5-8% in 2023, compared to the earlier forecast for a 3.5-5.5% drop. The earnings outlook, on an adjusted basis, has been slashed to $2.00-2.25 per share from the $3.35-3.65 per share estimated earlier.

FL opened lower on Monday, hurt by the post-earnings selloff that reversed most of the gains the stock made in the past several months.