FL is Another Brick-and-Mortar Retailer Coming Back
June 3, 2018
Brick-and-mortar retail has struggled in recent months, partly because of the ongoing shift of consumers going online to shop rather than driving to the physical stores and also because of continued fears that Amazon (AMZN) may expand into the apparel space.
This sector was hit or miss in the first-quarter earnings season, but I like the action we’ve been seeing recently. In particular, Foot Locker (FL) has really caught my eye.
The company released earnings before the open last Friday, May 25, and the stock went on to rally 20% throughout the day. That’s not something we’ve seen very often in the current reporting cycle, which often featured a more “sell the news” reaction even to good results. Adjusted earnings of $1.45 a share were up from $1.36 a share last year and beat the Street at $1.25, and revenue of $2.03 billion was also ahead of expectations for $1.96 billion.
Comparable-store sales were down year-over-year, but the drop wasn’t quite as big as anticipated. Plus, expectations are for that to change. CEO Richard Johnson said that “with the strength of our strategic vendor partnerships and our central position in youth culture, we continue to believe that we are poised to inflect positive comparable-store sales growth.”
The Beginning of a New Leg Up
Like most brick-and-mortar retailers, FL struggled to gain much momentum through the early part of this year; however, the recent strength has given it a much-needed boost and pushed it back to prices not seen since one year ago.
And I don’t think this is a fluke either. In fact, I think it’s a sign that this company has turned things around big time. That doesn’t mean there isn’t some execution risk, but I think management has figured it out.
The keys going forward will be continued shedding of non-performing stores, selling premium products and managing inventories effectively. To that point, FL is well on its way as it added 11 new stores in the first quarter, relocated 43 and closed 37.
I like that the stock has largely held on to its earnings surge, and I suspect this could be the beginning of its next leg higher. I see potential to the mid-$60s in the relative near term, and over time I see it getting back to the high $70s.