December 3, 2023

A sign hangs above the entrance to a Foot Locker store on Aug. 2, 2021, in Chicago, Illinois.

Scott Olson | Getty Images

locker Shares plunged more than 27% on Friday as a deeper-than-expected slowdown in consumers led to a double-digit drop in sales, prompting the company to cut its forecast just two months after launching.

It follows a string of better-than-expected earnings for major retailers Target, TJ Max and walmart this week, Foot Locker’s poor report could portend trouble for the rest of the industry, as a string of companies report earnings in the coming weeks.

Foot locker missed its top and bottom targets and said it had to aggressively promote merchandise to clear steep inventory levels and convince shoppers to spend their discretionary dollars on shoes and clothes.

Here’s what sportswear retailers do Its first-quarter performance compared with Wall Street expectations, according to a Refinitiv survey of analysts:

  • EPS: Adjusted 70 cents vs. 81 cents expected
  • Revenue: $1.93 billion vs. $1.99 billion expected

The company reported net income of $36 million, or 38 cents a share, for the three-month period ended April 29, compared with about $132 million, or $1.37 a share, a year earlier.

Sales fell to $1.93 billion, down 11.4 percent from $2.18 billion a year earlier.

Shares closed down 27 percent on Friday, giving the company a market value of $2.82 billion.

Foot Locker now expects sales to fall 6.5% to 8% this year, compared with a previous decline of 3.5% to 5.5%. It expects comparable sales to fall by 7.5% to 9%, compared with a previous range of declines of 3.5% to 5.5%.

Foot Locker expects non-GAAP EPS to be in the range of $2 to $2.25, compared with its previous forecast of $3.35 to $3.65.

The company expects gross margin to be in the range of 28.6% to 28.8%, compared with the previous range of 30.8% to 31%.

“You know, consumer demand has weakened since the investor day (earlier this year), and you know, there are signs that we think the pressure will continue,” Chief Executive Mary Dillon said on a conference call with analysts. “However, as we entered the year, we knew there was some pressure due to the lower rebates. We had hoped that things would recover quickly after this, but what we saw was that it really didn’t go as far as we had predicted or hoped for. “

Dillon said the company’s shoppers skew toward lower- and middle-income consumers who face ongoing inflationary pressures on discretionary spending from gasoline, rent and household staples like groceries. She added that with U.S. consumer debt hitting new highs, the firm has seen “an increase in the use of credit”

Back-to-school and holiday seasons have seen Foot Locker shoppers “converge,” but also get used to higher-than-usual promotions, the company said. Frank Bracken, Foot Locker’s chief commercial officer and executive vice president, said shoppers’ “resistance” to full-price merchandise in February, combined with macroeconomic factors, created “headwinds” for the company’s key operating brands.

Foot Locker’s poor report could be a harbinger of things to come, especially if retailers like Cole’s, american eagle, Abercrombie & Fitch, ralph lauren and gap Get ready to report earnings next week.

While major retailers reported better-than-expected earnings this week, 45% of companies in the sector have yet to report, Bank of America Trading noted. The bank said the quality of the upcoming listings was not as high as those reported this week.

“I think the FL comments punished the industry today and added to the pre-existing nervousness: results are still to be known in the next few weeks,” the trading desk told clients.

Foot Locker began aggressively promoting merchandise in April to drive sales, but heavy discounting combined with increased retail theft cut margins in the first quarter by 4 percentage points from a year earlier. The company expects promotions to weigh on margins going forward.

Analysts previously told CNBC that other softline retailers, or those selling soft goods such as clothing and shoes, may also report profits in the coming weeks as promotions increase across the industry to cater to price-conscious consumers. rate drops.

Nike ‘reset’ leads to slower sales

Dillon’s announcement comes eight months into her tenure at Foot Locker and just two months after she unveiled the company’s new strategy at an upbeat investor day in March.

dillon touted the company’s “re-engaged” with Nike — its most famous and largest supplier — and said that since taking over, she has spent “a significant amount of time … reinvigorating” Foot Locker’s relationship with the sneaker giant.

At its investor day, the company said Nike will continue to lead its brand portfolio, which makes up 55% to 60% of its portfolio. But on Friday, it said a “reset” in its business had led to a slowdown in comparable sales. It also pointed to “constrained supply” of Nike products, which have long been one of its biggest sales drivers.

“The mix outside of Nike was 35 percent this quarter, up a few percentage points, so we do feel like we’re making progress and diversifying the brand portfolio,” said Robert Higginbott, the company’s outgoing chief financial officer and senior vice president. said Tom. Investor Relations. “We don’t give an annual target for Nike or the vendor mix penetration. We remain very hopeful that over time, by 2026, we’ll have a 40%+ mix penetration with other vendors.”

While Nike has long been a big part of Foot Locker’s business, sometimes accounting for the majority of its sales, the sneaker giant is undergoing an internal restructuring. It forces Foot Locker to reduce its dependence on it.

Nike already counts Foot Locker as a key partner, but it has also spent the past few years pushing its direct-to-consumer business and cutting ties with wholesalers. Its wholesale revenue has increased over the past few quarters, but that’s mostly because Nike relies on those partners to clear excess inventory.

On its March earnings call, the company said it expected “slower” wholesale revenue in the coming quarters, which could signal more trouble ahead for Foot Locker.