Can Foot Locker Step It Up for the Holidays?
Year to date shares of Foot Locker (FL) - Get Report are up 16%, but they're still down 15% from their 52-week high. Can Foot Locker step it up for the holidays?
In late September, Foot Locker reported third-quarter earnings that beat Wall Street estimates. Adjusted earnings per share were $1.00, excluding a 43-cent litigation charge. That was ahead of analysts' estimates of 92 cents a share.
The better-than-expected earnings came from increased same-store sales and better gross margins. Comparable-store sales increased 8.7%, and gross margins expanded 60 basis points. Total sales increased 3.6%, to $1.794 billion this year, compared with sales of $1.731 billion for the corresponding prior-year period. Excluding the effect of foreign currency fluctuations, total sales for the third quarter increased 8.9%. The company ended the quarter with 3,432 stores.
Sales momentum was strong across every category. Footwear increased in the low double-digits. Running footwear increased mid-teens and basketball increased mid-single-digits, which was a slowdown from the low double-digit rate last quarter.
Foot Locker bulls argue for continued momentum in footwear and sports apparel and strong sales of higher-priced merchandise. The company has also benefited from fewer markdowns and has been able to leverage its occupancy costs. Those moves have boosted margins the last few quarters. Furthermore, the bulls argue that Foot Locker is trading below the industry's valuation. If the company can recapture its previous multiple (20x), the stock can trade into the mid-$80s from its current level around $65.
While Foot Locker had a good third quarter, the company faces difficult comparisons in the January quarter. Last year, Foot Locker benefited from several new footwear trends, including "technical" athletic footwear (footwear with built-in electronic sensors). Also, sales of basketball footwear have slowed. Last year sales of basketball shoes were very strong.
Last January, Foot Locker reported same-stores sales growth of 10.2%. Because of a lackluster product lineup compared to last year, and the possibility of a very promotional holiday season, I think Foot Locker will be lucky to report a 5% comp. If I'm right, a 5% comp will keep a lid on the stock. Share appreciation will slow to a dribble. I don't think Foot Locker can step it up for the holidays.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.