Why Foot Locker Is Confident in a Sales Rebound Ahead

Foot Locker (NYSE: FL) might finally be turning the corner. The athletic footwear and apparel retailer recently announced first-quarter results and, while they didn’t show an end to its sales or profit margin slide, the numbers suggest that these declines could be ending soon.

CEO Dick Johnson and his executive team added detail to those reported results during a conference call with Wall Street analysts. Management also explained why they’re confident that Foot Locker will return to sales growth sometime over the next few quarters.

Below are a few highlights from that discussion.

Image source: Getty Images.

Beating (low) expectations

“I am pleased to report that while we faced many of the challenges we anticipated, the 2.8% comparable sales decline in the first quarter was an improvement over the second half of 2017.” — CFO Lauren Peters

In early March, Foot Locker issued downbeat guidance that predicted things would get worse at the start of 2018 before improving later on in the year. Instead, sales-growth trends improved this quarter, dropping by about 3% compared to a 4% drop over the holiday season. While executives were happy about that modest outperformance, they were more encouraged by what it might mean for the rest of the fiscal year, given the robust pipeline of new footwear products on the way.

Wins and losses

“There were some solid performances that stood out above the rest and other areas where it will take some more time to improve our footing.” — Peters

Foot Locker posted uneven results across its portfolio of retailing franchises. The international divisions, particularly Europe and Canada, shrank. However, those challenges were mostly offset by improving trends in the core U.S. market, which saw healthier customer traffic and pricing trends thanks to a flood of fresh products from key suppliers like Nike (NYSE: NKE).

Image source: Getty Images.

Executives said they’re seeing a significant move by consumers toward this premium merchandise, and the shift led to higher selling prices in the quarter even though the industry continued to suffer from an inventory overhang.

Improving inventory levels

“Our inventory discipline, which included the use of markdowns, leaves us well positioned to flow in fresh and exciting product throughout the balance of the year.” — Peters

Foot Locker’s gross profit margin declined to 32.9% of sales from 34% a year ago as it continued to cut prices on slow-moving merchandise. But that slump wasn’t quite as bad as management had predicted. It also left the company in a far better selling position, with inventory dropping 5.4% even as the wider sales base inched higher by 1.2%.

Put these trends together, and Foot Locker is now expecting gross profitability to inch higher next quarter, which would mark its first increase since late 2017.

FL Gross Profit Margin (TTM) data by YCharts

It’s all about the products

“It is the combination of our outstanding product pipeline and our continued strategic focus on elevating the customer experience that gives us confidence that we can deliver on the top line and bottom line results to which we have guided throughout the balance of the year.” — Johnson

Though it’s still early in the year, management is feeling better about their 2018 sales and profit forecasts. To be sure, the retailer faces serious challenges as it builds up its digital sales channel and competes more directly with suppliers like Nike.

The profit outlook isn’t robust, either, as it will take plenty of resources to develop those e-commerce sales and fulfillment capabilities. Still, given the strong inventory position, improving pricing trends, and packed calendar for innovative footwear releases, Foot Locker is in good shape to return to sales gains as early as the third quarter of 2018. From there, it will be up to the management team to extend that positive momentum in what’s likely to remain a challenging sales environment.

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Demitrios Kalogeropoulos owns shares of Nike. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.

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