"Off On The Wrong Foot": Foot Locker Shares Crater As Consumers Pull Back
The discretionary spending downturn has become more evident as several mega-retailers reported earnings this week. Home Depot Inc. slashed its annual profit forecast, citing a slowdown in consumer spending. Target Corp. and Walmart Inc. also warned about waning sales. The latest to report is Foot Locker Retail, Inc., warning about a consumer slowdown that forced it to cuts its annual sales forecast.
Foot Locker shares plunged Friday morning after it reported awful fiscal first-quarter results and gave an ominous outlook for the year based on a "tough macroeconomic backdrop."
The already struggling shoe retailer missed revenue and profit and disclosed that it had to increase discounting of products to stimulate sales.
Here's a snapshot of first-quarter sales:
Comparable sales -9.1% vs. -1.9% y/y, estimate -7.9%
Adjusted EPS 70c vs. $1.60 y/y, estimate 77c
EPS 38c vs. $1.37 y/y
Sales $1.93 billion, -11% y/y, estimate $2 billion
Total location count 2,692, -4.4% y/y, estimate 2,634
Foot Locker US stores 741, -5.7% y/y, estimate 731
Kids Foot Locker stores 405, -2.9% y/y, estimate 410
Champs Sports stores 481, -6.8% y/y, estimate 438
Footaction stores 2, -91% y/y, estimate 2 (2 estimates)
Gross margin -400 bps
And current fiscal year forecast:
Sees sales -6.5% to -8%, saw -3.5% to -5.5%
Sees adjusted EPS $2.00 to $2.25, saw $3.35 to $3.65, estimate $3.62 (Bloomberg Consensus)
Sees comparable sales -7.5% to -9%, saw -3.5% to -5.5%, estimate -3.99%
Sees gross margin 28.6% to 28.8%, saw 30.8% to 31%, estimate 31%
Sees adjusted capital expenditures about $305 million, estimate $305.2 million
"Our sales have since softened meaningfully given the tough macroeconomic backdrop, causing us to reduce our guidance for the year as we take more aggressive markdowns to both drive demand and manage inventory," CEO Mary Dillon said in a statement.
New guidance from the retailer now expects sales to be down 6.5% to 8% for the year, compared with prior guidance down 5.5%. Also, it expects comparable sales to drop as much as 9%.
Investors weren't thrilled with the earnings and negative outlook, sending shares down more than 26% to the $30 handle.
In a call with analysts, Dillon said, "We've seen the consumer retrench as they continue to face pressure from rapid inflation, which we see squeezing their ability to spend on discretionary items including athletic footwear, in addition to overall discretionary spend seeing some pressure those spending dollars also appear to be directed more towards services and away from products as consumers are forced to be more choiceful and how to spend their money. When we gave guidance, we are seeing steep comp declines given a number of factors."
She explained more about the gloomy 2023 outlook:
"So, while 2023 was always going to be a reset year for us. We now expect a sharper decline in both sales and earnings this year due to steeper macro headwinds, combined with the other dynamics of our transition just mentioned despite the challenging environment. We remain confident in the Lace Up plan as a roadmap to return us to sustainable growth next year. With that, let me update you on our progress so far in the Lace Up plan strategic imperatives."
With 47% of the consumer base in the lower-income bracket, the CEO said, "The 10% decline in average tax refunds, which have an outsized impact on our business given we over index to a lower income consumer." Her statement implies that government stimulus checks will no longer have direct impacts on boosting sales.
Meanwhile, CFO Robert Higginbotham pointed out, "We have seen a significant pickup in theft activity."
Here's what Wall Street analysts are saying about the depressing results:
Wedbush (neutral, PT $40)
"Big miss-and-cut gets the Dillon era off on the wrong foot," analyst Tom Nikic writes
Results reflect the "challenging macroeconomic environment facing FL, a business that specializes in selling high ASP shoes to moderate-to-lower income consumers (a tough environment)"
Issues are made worse by reduced allocations from Nike and the lack of Yeezy product from Adidas, he says
"Notably, we don't view this as an indictment of new CEO Mary Dillon, as it's too early in her tenure for her to have made meaningful changes to the business, and many of the headwinds were either set in motion before she took the reins (NKE allocation reduction) or completely out of her control (Yeezy elimination, macro environment)"
Still, likely not the way she wanted to kick off her tenure, and it could be hard to find silver linings here in the near term"
Baird (neutral, PT $40)
"Disappointing setback following upbeat March investor day," writes analyst Jonathan Komp
Suspects that investors were "braced for weakness," but this update highlights the risks of adding exposure to "cyclically sensitive names in a more challenging retail environment"
Expects these results will pressure group sentiment today and may reflect "incremental weakness among lower-income consumers"
Retail earnings reports this week indicate a growing concern about American consumers who might be at a breaking point. Due to financial constraints, many prioritize staple goods over discretionary purchases. This week, New Bank of America Institute data showed notable spending slowdowns in upper-income consumers. Data has already shown that the lower-income cohort has dialed back spending.
