Foot Locker Slips Despite a Thorough Earnings Beat — Buy the Dip

FL stock - Foot Locker Slips Despite a Thorough Earnings Beat — Buy the Dip

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Since Amazon (NASDAQ:AMZN) and other e-commerce sites starting asserting themselves, brick-and-mortar stores have suffered considerable losses. But recently, some choice retailers have adapted to shifting market conditions. Sports-apparel specialist Foot Locker (NYSE:FL) is one of them, with FL stock pleasantly surprising Wall Street.

Just prior to its second-quarter fiscal 2018 earnings report, FL stock had gained a respectable 14.5% for the year. More importantly, since the beginning of this month, Foot Locker jumped nearly 10%. Investors obviously felt optimistic that the athletic-apparel retailer would bring home the goods.

Another significant advantage for those considering FL stock for the longer-term is the broader athletic industry’s bounce-back. Sector king Nike (NYSE:NKE) is simply unstoppable this year, blasting off to a 32% shareholder profit. Not only that, shares have consistently increased, with none of the drama impacting its competitors.

On the flipside, archrival Adidas (OTCMKTS:ADDYY) has gyrated wildly throughout 2018. Still, you must give credit when it’s due: ADDYY stock is up around 24% YTD.

I’ll take my own advice. Under Armour (NYSE:UAA), a company I’ve long criticized, is also pulling in an exceptional performance. UAA shares skyrocketed 48% YTD.

If even historical laggards are experiencing significant profitability, investors have every right to maintain confidence in FL stock. Logically, if product manufacturers enjoy robust sales growth, retailers stand to benefit. Changing consumer habits — a topic I’ll dive into later — also bodes well for Foot Locker.

More importantly, Foot Locker has responded outstandingly to critics who suggested that apparel-makers’ shift to direct-to-customer channels will hurt sales. Their answer? Prove it! At least going back to 2014, Foot Locker has produced consecutively rising annual revenues. This year appears to maintain that trend.

Still, anything can happen. Will FL stock continue to be a buy after Q2?

Foot Locker Delivers a Resounding Beat

If the earnings results are anything to go by, investors should have confidence that this turnaround is legitimate. Foot Locker made a resounding case for itself in key metrics, demonstrating the viability of its longer-term goals.

Prior to the Q2 disclosure, the Street’s consensus target pegged earnings per share at 70 cents. Percentage-wise, this edged nearer the higher end of individual estimates, which ranged from 65 cents to 75 cents. Actuals hit the most optimistic target at 75 cents.

The earnings haul also impressed against last year Q2’s results. Back then, the company only managed to deliver a 62-cent EPS. However, it was against consensus of 90 cents, indicating that despite today’s big beat, Foot Locker still has some work to do.

The revenue picture was equally optimistic. Reporting $1.78 billion in sales, this figure beat consensus estimates by a 1% margin. The sales haul also compared favorably against the year-ago quarter, which saw the retailer register $1.7 billion.

Prior to the earnings conference call, Foot Locker chairman and CEO Richard Johnson struck an understandably upbeat tone, anticipating even stronger sales in the second half. However, FL stock fluctuated significantly before the opening bell, from being down 2% to up 0.5%.

Why the volatility? I don’t quite understand the markets’ rationale. Wall Street may have wanted higher EPS growth, considering the year-ago quarter’s 90-cent consensus EPS forecast. Another explanation could be the store count, where management closed 83 locations year-over-year.

At the same time, Hibbett Sports (NASDAQ:HIBB) reported awful Q2 numbers, missing badly on both the top and bottom lines. It’s possible, then, that investors punished FL stock for perceived sports-retail weakness. However, in my opinion, this would represent a poor, premature reason to dump shares.

Strong Positives Underline FL Stock

In June of this year, Smart Investing editor Charles Payne declared that FL stock is a traditional-retailing investment on a genuine comeback trail. Specifically, Payne cited management’s efforts in revitalizing the brand. He stated that “keys going forward will be continued shedding of non-performing stores, selling premium products and managing inventories effectively.”

I agree on all counts, although I believe the premium products is the ultimate key to the company’s success. A significant advantage that Foot Locker levers is that they understand consumer trends, and therefore, focuses on what works. As Susquehanna Financial Group analyst Sam Poser put it, FL knows which shoes are cool.

Here’s the thing: today’s sportswear isn’t just about functionality. Increasingly, fashion and athletic-performance capacities are blending together. To survive in this cutthroat arena, you can’t have one without the other.

This trend within athletics-related retail becomes more apparent when you consider Foot Locker’s consumer demographics. You’d think that the under-30 crowd, or those in their prime-performance years, would represent the company’s biggest sales group. Instead, it’s the older 30-to-49-years crowd who are contributing the most revenues this year.

Although I don’t want to read too much into one statistic, the demographics tell a larger tale. Again, Foot Locker has found success with premium products. Those products are more expensive than their non-premium counterparts, making it easier for the older, wealthier crowd to purchase them.

But the underlying reality is that this high-end apparel resonates with most demographic groups. Therefore, as younger consumers grow older and attain more income, they’ll likely continue buying these products.

With Foot Locker proving it can engage their core audience, FL stock now looks an attractive play.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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