Foot Locker gets a fresh wind, shares surge

Key Points

• Foot Locker had another weak quarter but signs of regained traction are showing in the results. 
• Margin strength is the main highlight of the report. 
• An expansion into India will help drive growth over the coming years. 

Foot Locker NYSE: FL has struggled over the past year as supply chain headwinds turned into inventory headwinds compounded by sluggish consumer trends and the post-pandemic letdown in spending. Today's takeaway is that reality is not as bad as the fear, and now the stock is in rebound mode. The combination of better-than-expected results, margin resilience and a new push toward international growth have brightened the earnings picture, leading some to speculate on when the dividend payment will resume. 

Foot Locker announced a dividend pause at the end of Q2 to create flexibility for the business. In many cases, flexibility means attention to debt levels and cash flow, which was and is a concern. That said, the company’s balance sheet remains solid and is positioned to pursue growth in the coming year.

The cash balance is down but solid at $187 million, offset by a YOY increase in inventory, but long-term debt is also lower, and shareholder equity is up. The salient point is that leverage remains ultra-low, leaving Foot Locker in a lean, mean, fighting shape and ready to extend the rebound.

Foot Locker results are less bad than feared; guidance narrowed

Foot Locker had a weak quarter, but two things are apparent in the results and outlook. The first is that the YOY declines are narrowing, and analysts expect growth to resume next year. The 2nd is that margins are well above expectation. 

The top-line strength is consumer resilience, while the bottom line is “early progress” with the Lace Up strategy and strong merchandise margin. The consolidated revenue came in at $1.99 billion or down 8.6% on an 8% reduction in comp sales. The good news is that revenue was better than the analysts' forecast and helped catalyze the market for the stock to move higher. 

Champs Sports was the weak link banner-wise, with a contraction near 24%. This is due primarily to store repositioning and closures intended to improve metrics over the coming year. The core Foot Locker brand contracted by 6.5%, while Kids Foot Locker grew by 5.0%. North America led declines regionally at -9.5%, while EMEA contracted only 4.7% and APAC by 0.5%. 

Margin and guidance are another catalyst for the post-release surge in share prices. The company’s GAAP and adjusted EPS reached $0.30 to outpace the Marketbeat.com consensus estimate by 3600 basis points. This led management to narrow its guidance to a range within the previous guidance, giving investors some hope that business normalization is fast approaching. 

Foot Locker leans into international growth 

Foot Locker made several announcements with the Q3 release, including a deal to license growth in India. The company named two partners, one with exclusive rights to open Foot Locker branded stores and the other to operate the website, which should be a significant growth driver for the business. The international segment accounted for 26% of business in Q3, and India is a ripe market for growth. 

India’s GDP is expected to double over the next ten years and support robust growth in discretionary items. The sneaker market in India is about a tenth the size of the US today and will grow at a high-single-digit CAGR for the next few years. Because Foot Locker is a well-recognized brand providing access to a wide range of shoe brands, it is expected to be a leader in this market. 

The technical outlook: Foot Locker sprints higher

Shares of Foot Locker are sprinting higher on the Q3 news and showing a solid bottom. The bottom is near $20 and may be retested before a sustained rally forms. As solid as the move is, the market is still below critical resistance and the company is not out of the woods. Assuming the momentum continues to build, the stock may move sideways within its established range until more evidence is available. The critical resistance point is near $30; a move above that would be bullish.