Foot Locker, Inc. (NYSE: FL), the New York-based specialty athletic retailer, announced today that its Board of Directors declared a quarterly cash dividend on the Company’s common stock of $0.31 per share, which will be payable on February 2, 2018 to shareholders of record on January 19, 2018.
Remember when we told you last spring that there was a rare opportunity in the stock of this spring? Had you purchased then, you would have seen a 45% gain if you sold at the top. Then, shares started cratering as all of retail has been decimated in the last 6 months. It has really been ridiculous the sentiment. There is a palpable belief that retail is dead, and very few retailer stocks have down well given the fears over Amazon (AMZN) taking over the world. All footwear and sporting goods related stocks have perhaps been hit the absolute hardest. And it is only getting worse with this report. This news comes not just from Amazon seeing record revenues, but news that Nike (NKE) would sell on Amazon. Those names selling footwear, in particular Foot Locker, as well as Finish Line (FINL) and DICK’S Sporting Goods (DKS) are seeing multi-year lows.
Interestingly, most channels indicate that footwear sales are still strong, but Foot Locker is cratering and so its pristine fundamentals coming into this morning met nothing. We remained bullish as online sales were growing for all these companies, and Foot Locker is one of Nike’s most important customers, in addition to Adidas and so many more. People try on shoes. It is one item Amazon will have trouble with. It may get there, but it’s not happening in a matter of a quarter. The selloff is in our opinion was ludicrous coming into the report, and now we are swallowing our pride and saying plainly that it truly is going to be a rough road. No one saw this devastation coming, at least not of this magnitude. We put our money where our mouth was as this was among our largest positions, and we are taking a bath.
Let’s talk about everything you need to know. What do we mean? In Q2 2017, the company reported net income of $51 million ($0.39 per share). On an adjusted basis, earnings were $0.62 per share and absolutely whiffed on estimates by $0.28. How do you not warn us ahead of time? Disgusting. Digging deeper, we see the largest issue and that was the decline in same-store sales. This is a key indicator, and had been great for many quarters up until the last few months. What is going on? They imploded, falling 6% year-over-year while revenue generated at these stores fell 4.4%, to $1.78 billion in Q2. Of course, currency issues continue to plague domestic companies, and if we control for this impact, sales fell 4.3%. Ouch. This missed estimates by $100 million (given the earnings miss I thought this was going to be far worse). What hurt profit was rising expenses and that shocked us. Expenses rose to 20% of sales. This helped gross margin decline to 29.6%, from 33% last year. That is just devastating. Coming into the quarter we fully expected growth to continue or at least be flat, while margins would be solid and comps perhaps softening but being positive. This is truly something.
What can be done? The company will have an inventory issue if it doesn’t manage stores and get more traffic. The company opened 24 new stores, remodeled or relocated 38 stores and closed 19stores. As of July 29, 2017, the company operated 3,359 stores in 23 countries in North America, Europe, Australia, and New Zealand. In addition, 68 franchised Foot Locker stores were operating in the Middle East and South Korea, as well as 14 franchised Runners Point stores in Germany. Now look. There is room to trim here. Shut down underperforming stores and focus on boosting online presence.
What else can we do? Well management has a great balance sheet to work with. Let’s close some stores, increase promotions to bring back customers, lets step up the buybacks NOW, because shares are cheap, even with declining earnings expectations this year. This excuse of not enough innovative products carries some weight, but with the holidays approaching now is the time to plan. Buyback more shares, defend the shareholders and create value. The balance sheet is more than respectable, as it is cash rich with limited debt. It has cash and cash equivalents of $1.04 billion, with $126 million in debt. During Q2 2017, Foot Locker repurchased just 350,000 shares of its common stock for $21 million.
Looking ahead, earnings are on tap for tomorrow, and we will closely be watching the report.
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