Athletic apparel and footwear retailers are down after Foot Locker (FL) reported weaker than expected earnings for the second quarter.
EARNINGS AND GUIDANCE: Foot Locker reported Q2 earnings per share, excluding a $50M pre-tax litigation charge, of 62c on revenue of $1.7B compared to analyst estimates of 90c and $1.8B, respectively. The company also reported a decrease of 6% in same-store sales for the quarter. CEO Richard Johnson said, “sales of some recent top styles fell well short of our expectations and impacted this quarter’s results. At the same time, we were affected by the limited availability of innovative new products in the market. We believe these industry dynamics will persist through 2017, and we expect comparable sales to be down 3% to 4% over the remainder of the year.” On Foot Locker’s Q2 earnings conference call, the company said it will devote an increasing share of capital expenditures to digital as well as invest to create a more modern supply chain. The company also said it expects to reduce fiscal year 2018 CapEx level and to close up to 135 stores in 2017. In addition, the company expects gross margin to decline 230-250 basis points in Q3, gross margin to decline 150-170bps in Q4 and second half 2017 EPS to decline 20%-30%.
ANALYST OPINION: After the report, Citi analyst Kate McShane said Foot Locker’s Q2 results and outlook “greatly” disappoint. She said the company posted its first negative comp since Q4 of 2009 and along with Foot Locker, she expects weakness primarily in shares of Nike (NKE) and Finish Line (FINL) but also Under Armour (UAA, UA) and Dick’s Sporting Goods (DKS). McShane currently has a Buy rating and an $81 price target on Foot Locker. In addition, Piper Jaffray analyst Erinn Murphy said earnings were “well below expectations” due to weak sales of top styles and limited availability of new products, which she expects to continue during FY18. While the company is working on expense reductions, she said she considers Foot Locker to already be a lean operator and she remains cautious on domestic athletic retailers. Murphy holds a Neutral rating on the stock and a $60 price target.
