Foot Locker's stock heads for record selloff as price cuts weigh on outlook

By Tomi Kilgore

Timing for reaching adjusted margin target delayed by two years given lower starting point to end 2023

Shares of Foot Locker Inc. were in danger of suffering a record selloff Wednesday, after the athletic shoe apparel retailer provided a full-year profit outlook that was below expectations, and pushed back the timing of reaching its target for adjusted margins by two years.

The downbeat outlook, which followed increased markdowns to reduce inventory at the end of the year, offset better-than-expected fourth-quarter results.

The stock (FL) plummeted 30.8% in afternoon trading toward, which puts it on track for the biggest one-day decline on record, based on available FactSet data back to January 1972. It was headed for the lowest close since Nov. 27, 2023.

Prior to the selloff, the stock had run up 106.2% since it closed at a 13-year low of $16.64 on Aug. 23, 2023.

Chief Executive Mary Dillon said while significant momentum was built through the holiday season with "full-price selling" and "compelling promotions," the company also then "proactively reinvested in markdowns" to reduce inventory below expectations at the end of the year.

The company was "more aggressive" in cutting prices in areas where inventory levels were "challenged," particularly in apparel.

As a result, fiscal fourth-quarter gross margin declined by about 3.5 percentage points, to 26.8%. Meanwhile, the value of merchandise inventories held as of Feb. 3 was $1.51 billion, down 8.2% from a year ago.

The company said it still believes its "Lace Up" plan to boost earnings will help the company reach its target for earnings before interest and taxes (Ebit) margin of 8.5% to 9%. But there's a catch.

"Given our lower starting point exiting 2023, we expect a two-year delay in achieving that goal and now see reaching that target by 2028," said Chief Financial Officer Mike Baughn.

CFRA analyst Zachary Warring cut his rating on the stock to strong sell from sell, as he believes valuation is "extreme" after its doubling in recent months.

"[Foot Locker] has not proven it can grow top- or bottom-line consistently in this new retail environment of direct-to-consumer," Warring wrote in a note to clients.

For the quarter to Feb. 3, the company swung to a net loss of $389 million, or $4.13 a share, from net income of $19 million, or 20 cents a share, in the same period a year ago.

Excluding nonrecurring items, such as charges related to investments and the settlement of pension obligations, adjusted earnings per share fell to 38 cents from 97 cents, but beat the FactSet consensus of 32 cents.

Total revenue grew 2% to $2.38 billion, above the FactSet consensus of $2.28 billion.

Same-store sales, or sales of stores open at least a year, declined 0.7%, as footwear sales rose in the "low single-digits" percentage range while apparel sales were down "low double digits." But the decline beat expectations of a 2.3% drop.

The company said it closed 70 Champ stores during the quarter, and are currently targeting roughly 40 closures in 2024, including 15 in the first half of the year.

For fiscal 2024, the company expects adjusted earnings per share of $1.50 to $1.70, below the FactSet consensus of $1.86.

Total sales are expected to be down 1% to up 1%, while the current FactSet sales consensus of $8.03 billion implies a 1.7% decline.

The stock has shed 16% over the past three months, while SPDR S&P Retail ETF XRT has rallied 14.2% and the S&P 500 index has advanced 12.6%.

-Tomi Kilgore

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03-06-24 1258ET

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