Footlocker Trips On Supply Chain Worry

Supply Chain Disruption Cuts Into Footlocker Results 

Footlocker NYSE: FL shares are down more than 5.0% in premarket trading after confirming something we already knew to be true. The company says the manufacturing shut-downs in Vietnam and other parts of Asia during the 3rd quarter are going to have an impact on holiday sales. The major shoe retailers have been getting by on inventory for the last few months but that may be about to change. While manufacturing is back online in Asia, industry insiders think the supply chain won’t fully recover until sometime next year. What that means for Footlocker is a chance it will run low on its best-selling items but also a chance to outperform now diminished expectations. What it means for Footlocker investors is another chance to get into this stock before it sets the next multi-year high. The question is when will be the right time to buy? 

"We expect global supply chain constraints to persist throughout the fourth quarter; that said, we believe we are positioned for the holiday season, with positive momentum and inventory levels ready to meet customer demand,” says Andrew Page, Senior Vice President and CFO of Footlocker. 

Nothing Not To Like In Footlocker Results 

There is nothing not to like in Footlocker’s results other than the warning that was more of a cautionary statement than a forecast of doom. The $2.18 billion in revenue is down sequentially but that was expected. What was not expected was for the 3.9% of growth to outpace the Marketbeat.com consensus by 185 basis points, for growth to top 13% in the 2-year stack, or for margins to widen. On a comp basis, comp sales are up 2.2% and aided by a positive FX tailwind and acquisitions made during the year. 

Moving down to the margin, the company experienced a 380 basis point improvement in gross margin that carried through to the bottom line. On the bottom line, the $1.52 in GAAP earnings is down YOY due to several impairments and some acquisitions costs but also beat the consensus estimate by $0.12. The adjusted earnings are even better having grown on a YOY basis and beating the consensus by $0.56. 

The company did not give any formal guidance but everything within the report points to continued strength in the 4th quarter despite the impact of supply chain disruption. Not only does the company indicate robust demand but a 10% increase in YOY inventory that should help sustain the business over the next month. The real risk for the company is what comes next? Manufacturing is back online but it may take several months for new inventory to arrive. Channel checks in other industries reliant on Asian manufacturing have new orders arriving sometime next fall. In that scenario, it looks like shelves at Footlocker could have some vacant space some the calendar Q1 period. 

Expect Capital Returns To Continue At Footlocker 

Footlocker is certainly facing a hurdle in the form of inventory and the timing of shipments but that is a problem for next year. Until then, investors can expect capital returns from Footlocker to continue. The company repurchased $129 million worth of its shares during the last quarter and there is no reason to expect that to end. The company’s free cash flow and balance sheet are more than strong enough to handle it and continue paying the dividend as well as increasing it back to the pre-COVID levels. 

The Technical Outlook: Footlocker Falls Back To Support 

Price action in Footlocker fell more than 5.0% in early premarket action but that may just be a knee-jerk reaction. Price action is still above key support at the short-term moving average and may recover some of its loss during the day. If not, and price action falls below the short-term EMA, a move down to the $48 to $50 range is possible. If buyers step in at today’s open and push the stock higher, we see it stalling out in the $60 to $62.50 range. In either case, we view this stock as too risky for new money until the supply chain picture becomes a little clearer.