Business
Here’s why Jim Cramer is sticking with Foot Locker despite a terrible quarter and big stock drop
Club owner Foot Locker ( FL ) reported disappointing first-quarter 2023 financial results and guidance ahead of the open Friday. A need to flush out elevated inventory weighed on numbers and inventory. Total revenue fell 11% year-over-year to $1.93 billion, missing analysts’ forecasts of $1.99 billion, according to estimates compiled by Refinitiv. Adjusted EPS (earnings per share) fell 56% to 70 cents, also below estimates. Analysts had expected EPS of 81[ads1] cents in the fiscal first quarter. This is clearly not the result we were looking for. We expected the quarter to be weak and previously commented that it is too early to see the business turning around. However, we are surprised by the extent of the reset. That said, as we indicated earlier Friday, this appears to be the “kitchen sink.” So we’re holding on to our small position in the name for now despite the stock losing more than 25% on Friday. The drag on the reported results was a combination of a concerted effort to reduce Foot Locker’s reliance on Nike; a 10% decrease in tax refunds to American workers; and the closure of the Eastbay brand. Foot Locker, which announced the closure of Eastbay in December, will concentrate on its namesake and Champs stores. Unfortunately, the decline from these headwinds has also proved to be weaker than management previously expected. After a strong holiday season, the team said it saw the consumer “tightening up” due to elevated inflation squeezing discretionary budgets and a redirection of remaining discretionary dollars toward services and away from goods. As a result of these issues and the company’s diminished outlook, we reduced the club’s price target on the stock to $36 from $45. Our new course target reflects approx. 16x management’s updated earnings forecast, which we believe will prove to be the bottom line in earnings as CEO Mary Dillon’s “Lace Up” strategy takes hold into 2024. While disappointed, we believe management’s turnaround strategy will transform the company into a leaner and more efficient business, with greater customer loyalty, a better omnichannel experience and improved profitability over time. Make no mistake, close vision is challenged. But the full benefits of this strategy should become more apparent as the operating environment improves. When we started a position at Foot Locker in March, we knew the company wasn’t going to be fixed quickly. But we had faith then and still have faith that Dillion, who did a great job as CEO of Ulta Beauty , would bring his magic touch to Foot Locker. FL YTD mountain Foot Locker YTD Guidance Management said it lowered its full-year forecast as weakness seen in April at the end of the quarter and into May forced Foot Locker to more aggressively discount merchandise in an effort to reduce inventory. This increased advertising activity is expected to continue for the rest of the year. The team now expects sales in fiscal 2023 to fall 6.5% to 8% (from a 3.5% to 5.5% decline previously), well below the 4.6% decline that analysts had modeled. Adjusted full-year EPS guidance was also revised down to a range of $2 to $2.25 (down from $3.35 to $3.65 previously), significantly below expectations of $3.46. For the full year, same-store sales are also expected to decline 7.5% to 9%, with gross margin down to a range of 28.6% to 28.8%. Selling, general and administrative (SG & A) expenses as a percentage of revenue are slightly better than expected at 22.4% to 22.6%. Quarterly Comment Gross margin in Foot Locker’s fiscal first quarter took a hit — down to 30% from 34% a year ago and below estimates — due to markdowns and an increase in what’s known in the retail industry as shrink, which means shoplifting. Theft accounted for 250 basis points, or 2.5 percentage points, of the gross margin. Lower occupancy accounted for the remaining decline in gross margin of 400 basis points year-on-year, as shown in the table above. Same-store sales fell 9.1% in the first quarter; a much steeper fall than the 7.7% decline that had been predicted. (Jim Cramer’s Charitable Trust is long FL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive an exchange alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a share in his charitable fund’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE INVESTMENT CLUB INFORMATION ABOVE IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH OUR DISCLAIMER. NO OBLIGATION OR OBLIGATION EXISTS OR IS CREATED BY YOUR ACKNOWLEDGMENT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR REWARDS ARE GUARANTEED.
Shoppers and pedestrians pass in front of a Foot Locker store on the Third Street Promenade in Santa Monica, California.
Patrick T. Fallon | Bloomberg | Getty Images
Club team Foot Locker (FL) reported disappointing first-quarter 2023 financial results and guidance before the open Friday. A need to flush out elevated inventory weighed on numbers and inventory.
