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Trouble at Foot Locker as Shares Fall Following Second-Quarter Miss

Is there trouble brewing at Foot Locker?

After the athletic footwear retailer released its second-quarter financial results Friday morning, showing a big miss in sales and a smaller miss in earnings, its share price fell from $41.88 to $35.62 at the time of writing—a drop of more than 16 percent.

In a Nutshell: The trouble continues for Foot Locker as it reported another lackluster quarter on Friday, which makes two straight after the footwear retailer posted one of its best years as a business in 2018. Since then, it has made another bet on sneakerhead culture, including an investment in streetwear resale platform, GOAT.

However, some have suggested that as brands like Nike continue to develop their digital distribution networks, Foot Locker could be the one left out in the cold. As investors punish Foot Locker for a disappointing quarter, the chain continues to close stores—now down 47 stores in the first half of FY19—despite increasing its total first-half sales by 1.2 percent compared to the corresponding period in FY18. On the other hand, net income for the retailer has fallen in FY19, down $21 million from the first half of the previous fiscal year.

However, Foot Locker maintains that it continues to make crucial investments in the overall business to combat the headwinds and disappointing sales growth plaguing 2019. SG&A expenses as a percentage of net sales continued to rise in the first half, increasing from 21.3 percent to 22.2 percent in the second quarter. Foot Locker said this was a direct result of its ongoing investment in “digital capabilities and infrastructure.”

“In addition to making meaningful investments in our stores and digital capabilities during the quarter, we maintained our disciplined approach to inventory management and are set up to continue flowing fresh, exciting product offerings for the back-half of 2019,” Lauren Peters, executive vice president and chief financial officer at Foot Locker, said in a statement.

Sales: Foot Locker reported total sales of $1.774 billion in the second quarter, 0.4 percent lower than the comparable period in FY18 and below the average analyst expectation of $1.82 billion. Same-store sales increased modestly at 0.8 percent during the quarter but both marks were significantly lower than what the brand achieved in the first quarter.

Despite this misstep, Foot Locker said that it still expects “mid-single digit” comparable sales improvement over the remainder of the fiscal year.

Earnings: On net income of $72 million, Foot Locker reported adjusted earnings per share of 66 cents—below the 67 cents expected by Wall Street Analysts and well behind the net income of $88 million and adjusted EPS of 75 cents earned in the comparable period last year.

Peters said that the retailer was optimistic it could return to “high-single digit adjusted EPS growth” for the full year.

CEO’s Take: Foot Locker president and CEO Richard Johnson said he expects Foot Locker to return to strength on the back of its relevance to sneaker culture.

“While our results in the second quarter did come in at the low end of our expectations, we saw improvement in our performance as we moved through each month of the quarter,” Johnson said. “We remain deeply connected with sneaker and youth culture, and believe this positive momentum exiting the quarter has us well-positioned for the back-to-school period and beyond. Further, our team continues to make meaningful progress against our long-term strategic imperatives.”

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