Club holding Foot Locker (FL) reported disappointing fiscal 2023 first-quarter results and guidance before the opening bell Friday. A need to flush out elevated inventories weighed on the numbers and the stock. Total revenue fell 11% year-over-year to $1.93 billion, missing analysts’ forecasts for $1.99 billion, according to estimates compiled by Refinitiv. Adjusted EPS (earnings-per-share) declined 56% to 70 cents, also short of estimates. Analysts had expceted EPS of 81 cents in fiscal Q1 Bottom line This is clearly not the result we were looking for. We expected the quarter to be weak and commented previously it’s too early to see the business turn. However, we are surprised by the magnitude of the reset. That said, as we indicated earlier Friday, this appears to be the “kitchen sink” quarter. So, we’re sticking with our small position in the name for the time being despite shares losing more than 25% on Friday. Drags on the reported results were a combination of a concerted effort to reduce Foot Locker’s reliance on Nike ; a 10% decline in tax refunds to American workers; and the shutdown of the Eastbay brand. Foot Locker, which announced the Eastbay closure in December, will concentrate on its namesake and Champs stores. Unfortunately, the rebound from these headwinds has also proven weaker than management previously expected. Following a strong holiday season, the team said they saw the consumer “retrench,” due to elevated inflation squeezing discretionary budgets and a redirect of remaining discretionary dollars toward services and away from goods. As a result of those issues and the company lowering outlook, we reduced our Club price target on the stock to $36 from $45. Our new price target reflects about 16x management’s updated earnings forecast, which we think will prove to be the trough in earnings as CEO Mary Dillon’s “Lace Up” strategy takes hold into 2024. Though disappointed, we do believe that management’s turnaround strategy will transform the company into a leaner more efficient business, with greater customer loyalty, a better omnichannel experience, and improved profitability over time. Make no mistake, near-term is challenged. But, the full benefits of this strategy should become more clear as the operating environment improves. When starting a position in Foot Locker in March, we knew the company would not be fixed quickly. But, we had faith then and still have faith now that Dillion, who did a great job as CEO at Ulta Beauty , would bring her magic touch to Foot Locker. FL YTD mountain Foot Locker YTD performance Guidance Management said it lowered full-year forward guidance as weakness seen in April at quarter-end and into May forced Foot Locker to more aggressively discount items in an effort to reduce inventory. This increased promotional activity is expected to continue for the remainder of the year. The team now expects fiscal 2023 sales to be down 6.5% to 8% (from 3.5% to 5.5% decline previously), well below the…
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