Foot Locker sees softer-than-expected sales, weaker start to back-to-school

By James Rogers

Foot Locker's stock tumbled more than 31% following the company's second-quarter results

Foot Locker Inc. is seeing a weaker start to the back-to-school season amid pressure on customers' discretionary spending.

"Sales have been softer than expected through the first half," said Foot Locker (FL) Chief Executive Mary Dillon, during a conference call to discuss the results. "The store traffic and conversion challenges we began to see in late Q1 persisted through the second quarter as our customer remained cautious with their discretionary dollars."

"As a result, we promoted more heavily than initially planned to better compete for a share of our customer's wallet and manage our inventory levels," she added.

Related: Foot Locker's stock tumbles 34% as company suspends dividend after swinging to a loss

The retailer has seen a weaker start to the back-to-school season, according to the Dillon. July and August have been a little bit weaker than Foot Locker would have hoped, she added. "I would say that back-to-school is a tale of many different kinds of products and categories that consumers participate in," she added, noting that sneakers are a part of that equation, as are school supplies and sports equipment. "We feel like we're set up well in terms of having the products that our customers want for back to school, but it's a little bit softer for us -- we would add that pressure on our customer skews a little bit more towards pressure on discretionary."

Foot Locker's stock fell 31.6% Wednesday after the company swung to a second-quarter loss, lowered its full-year guidance, and suspended its dividend.

The company's inventory level was up 11% year-over-year during the second quarter, but is moderating, according to Foot Locker. "We're pleased with the progress that we made in the quarter," said CFO Mike Baughn, during the conference call to discuss the second-quarter results. "We are calling out that we will end the year flat to slightly down."

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Foot Locker saw "elevated shrink levels" during the quarter, according to Baughn. Inventory shrink continues to be a key theme of retail earnings. While there are a number of potential reasons behind inventory shrink -- such as damaged items -- theft and organized retail crime are increasingly important drivers, according to major retailers such as Target Corp(TGT) and Home Depot Inc. (HD).

"The largest driver has been the promotions, the second biggest driver has been the deleverage we have seen within occupancy costs," Baughn said, in response to an analyst's question. "Incorporated into our back-half guidance is expected similar shrink levels to what we have had year to date."

The retailer's stock has fallen 57.9% in 2023, compared with the S&P 500 index's SPX gain of 15.3%.

Ciara Linnane contributed.

-James Rogers

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08-23-23 1242ET

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