Foot Locker's Stock Drops After Profit Beats Forecasts, but Outlook Remains Unchanged

Shares of Foot Locker Inc. appeared to be headed for a decline on Wednesday after the athletic footwear and apparel retailer reported quarterly results that exceeded expectations, despite posting its first adjusted quarterly loss in four years. The company maintained its full-year outlook and revealed plans for store closures in certain regions as part of its ongoing "Lace Up" strategy, which aims to drive growth and increase shareholder value.

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Foot Locker's CEO, Mary Dillon, expressed confidence in the company's strategic direction, stating, "The 'Lace Up' plan is showing positive results, as indicated by our return to overall and comparable sales growth, along with an expansion in gross margins during the second quarter." She also noted that the company saw improving sales trends as the quarter progressed, including a strong start to the back-to-school shopping season.

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Despite these positive developments, Foot Locker's stock (FL) experienced an 8.6% drop in premarket trading, which could mark its most significant one-day selloff in a year. This selloff comes on the heels of reports that the company's second-largest shareholder had been selling shares over the past couple of weeks, raising concerns among investors.

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For the quarter ending August 3, Foot Locker reported a net loss of $12 million, or 13 cents per share, a widening of losses compared to the $5 million, or 5 cents per share, loss in the same period last year. However, when excluding nonrecurring items, the company's adjusted loss of 5 cents per share was better than the FactSet consensus estimate of a 7-cent loss. This marks Foot Locker's first adjusted per-share loss since the fiscal first quarter of 2020, according to FactSet data.

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On the revenue front, Foot Locker reported a 1.9% increase, bringing total revenue to $1.896 billion, slightly surpassing the FactSet consensus estimate of $1.888 billion. The company also managed to control costs effectively, with the cost of sales rising by only 1.2% to $1.37 billion. This helped lift the gross margin to 27.7%, up from 27.2% in the same quarter last year.

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Foot Locker's comparable sales, which measure the performance of stores open for at least a year, rose by 2.6%, beating the expected 1% growth. This growth was driven by strong performance in global Foot Locker stores and Kids Foot Locker stores, which saw comparable sales increase by 5.2%.

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Looking ahead, Foot Locker reaffirmed its full-year guidance. The company expects adjusted earnings per share to be between $1.50 and $1.70, with sales growth projected to range from a 1% decline to a 1% increase. Additionally, Foot Locker anticipates comparable sales growth of 1% to 3% for the full year.

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During the second quarter, Foot Locker opened five new stores but also closed 31 stores, leaving the company with 2,464 stores in 26 countries. As part of its international strategy, Foot Locker announced plans to close both its physical stores and e-commerce operations in South Korea, as well as in Denmark, Norway, and Sweden. These closures reflect the company's ongoing efforts to optimize its global footprint and focus on markets where it sees the greatest potential for growth.

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Foot Locker's stock had recently reached a five-and-a-half-month high on August 22, but the company's performance in the stock market has been mixed this year. As of Tuesday, the stock had gained 5.3% year to date, which is below the performance of broader retail and market indices. For comparison, the SPDR S&P Retail ETF (XRT) has risen 7.4% this year, while the S&P 500 index (SPX) has advanced 18%.

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The recent decline in Foot Locker's stock price underscores the challenges the company faces, even as it makes progress in executing its strategic initiatives. The "Lace Up" plan, which was introduced a year ago, is beginning to show signs of success, with improvements in sales growth and margins. However, the first adjusted quarterly loss in four years, coupled with concerns about shareholder activity and store closures in international markets, has raised questions about the company's ability to sustain its momentum in the highly competitive retail environment.

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As Foot Locker continues to navigate these challenges, investors will be closely watching how the company manages its cost structure, drives growth in key markets, and adapts to changing consumer behavior. The company's ability to deliver on its full-year guidance and capitalize on the early success of the "Lace Up" plan will be critical in determining its future performance and investor confidence.

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