What’s the latest surge at Behind Foot Locker?
The sneaker and clothing retailer has been quite volatile over the past few weeks. foot storage box (NYSE:FL). Since the company announced fourth-quarter earnings on March 6, its stock price has plummeted about 30%, first to about $24 per share and then to $22 per share over the next week or so. However, Foot Locker’s stock price has continued to rise steadily since then.
On Wednesday, the stock surged another 7% to about $29 per share. Let’s take a look at what’s happening at Foot Locker to cause this volatility and determine where this may go in the future.
The earnings report was a mixed bag
The massive decline following its fourth-quarter earnings report seemed a bit overblown, as Foot Locker actually beat estimates. Nonetheless, the company’s revenue increased about 2% year-over-year to $2.38 billion, while operating income fell 44% to $33 million due to increased selling, selling, general and administrative expenses.
Foot Locker reported a net loss of $389 million, down from a net profit of $19 million in the same quarter a year ago. However, the net loss was driven by $555 million in one-time costs related to impairment of minority investments and partial settlement of pension plan obligations. On an adjusted basis, the company’s net income was $36 million, which is still down from $92 million in the fourth quarter of 2022.
On the bright side, Foot Locker reduced its inventory by 8.2% compared to the previous year. This is important because lower inventory leaves more space for newer, more profitable products and lowers the cost of holding excess inventory.
So while the company’s numbers weren’t great and weren’t expected, the outlook disappointed investors. Foot Locker called for 2024 sales growth to be between a 1% decline and a 1% increase, a store countdown of 4% and adjusted earnings per share between $1.50 and $1.70. In this range, adjusted EPS is up slightly from $1.42 in 2023, but still below analysts’ forecasts of $1.95.
Foot Locker also said it has postponed its 8.5% to 9% earnings before interest and taxes (EBIT) margin target by two years to 2028. This may have disappointed investors as well. The company expects EBIT margins of 2.8% to 3.2% in fiscal 2024.
The view isn’t that bad
In the days and weeks following the earnings report, several analysts reported more optimistic outlooks for Foot Locker after digesting the numbers. Evercore upgraded the stock to Outperform and raised its price target from $28 to $32. This reflected expectations for sales growth in the second half of the year. Evercore said Foot Locker will chase demand with lower inventory, among other potential sales drivers, including new loyalty programs, new digital apps and refresh initiatives.
Guggenheim also downgraded Foot Locker to a buy rating with a $30 target price, while Bank of America downgraded the stock to a neutral rating with a $27 target price. Additionally, both Citi and UBS upgraded Foot Locker from Sell to Neutral.
Analysts at Citi said the company could benefit from Nike expanding its wholesale sales channels and a strategic shift away from pushing in-house digital sales in recent years. This could direct more of Nike’s (NYSE:NKE) sales to Foot Locker.
Overall, the sharp post-earnings decline appeared to be an overreaction to Foot Locker pushing back its EBIT margin target. The company appears to be heading in the right direction, but it will probably be a long, slow climb. No significant movement is expected as the price is likely to hover around current levels. However, investors may want to keep this in mind and watch the potential impact of these catalysts mentioned above.
