Store closures, high expenses might hamper Foot Locker’s recovery

Shoe retailer Foot Locker, Inc. (NYSE: FL) managed to perform better than most of its peers during the pandemic mainly due to the stable demand for athletic footwear, thanks to its innovative portfolio and strategic partnerships. But the continuing supply chain disruption and store-closures remain the cause for worry as far as recovery is concerned.

The company shrugged off the market slowdown in the early weeks of the virus outbreak and stayed in the positive territory since then. During the holiday season, the ramped-up digital platform also contributed to sales. Experts see the company’s market value growing in double-digits in the next twelve months. Still, investment decisions should be taken carefully, given the persistent uncertainty and underlying headwinds, though the stock looks rightly priced.

Improving Sentiment

After curtailing discretionary spending on items like apparel and footwear during the pandemic, customers seem to have become more liberal in their spending habits as markets started reopening and the government’s support programs lifted confidence. The improvement should reflect in the stock’s performance in the coming months.

But the heavy reliance on Nike, Inc. (NKE) and some other popular brands does not bode well for the company and points to the need for greater brand diversity. Meanwhile, the management’s goal of bringing up a ‘sneaker culture’ to boost demand looks too ambitious. The falling store count and inventory delays caused by supply chain blockage would likely remain a drag on performance in the near term.

Mixed Q4 Outcome

Comparable store sales declined 2.7% in the final three months of 2020, raising concerns that the rebound is losing steam. Consequently, sales decreased to $2.18 billion and missed Wall Street’s projection. Adjusted earnings dropped to $1.55 per share but came in above the forecast. The unimpressive performance can be linked to the decrease in the number of functional stores, especially in the international market. Naturally, the management withheld guidance for the current fiscal year but reversed a part of the recent dividend cut by announcing a 33% raise.

Growth Strategy

The company has been striving to expand its foothold in the highly competitive market through strategic tie-ups – made a major investment in online sneaker marketplace GOAT and expanded the partnership with Nike. Recently, the management announced a $275-million capital allocation plan for 2021, which is up77% from last year, to emerge successfully from the virus crisis and achieve the growth goals.

From Foot Locker’s Q4 2020 earnings call transcript:

“We’ve gleaned many insights through this unique COVID period, from the power of our enhanced digital capabilities to the strength of our relationships with our vendor partners, the depth of our connections with our consumers, and the exceptional resilience of our global team. When viewed through the lens of our strategic imperatives, these insights will help guide our thinking into fiscal 2021 as we execute against a number of opportunities in the marketplace and strengthen our position at the center of youth and sneaker culture.”

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Read management/analysts’ comments on Foot Locker’s Q4 report

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The stock shifted to recovery mode after falling sharply last week when the market responded negatively to the company’s weaker-than-expected sales performance. After closing the last session down 9%, it traded slightly higher during Monday’s early session. Interestingly, the shares are still up 23% since the beginning of 2021.