Foot Locker drops 19% after declines in earnings and revenues

Foot Locker Q3 2024 Earnings Report

Foot Locker reported a disappointing Q3 2024, missing Wall Street’s expectations on both earnings per share (EPS) and revenue, while cutting its full-year guidance. The sneaker retailer continues to face challenges related to soft consumer demand, elevated promotions, and weakened performance from its largest brand partner, Nike.

Q3 2024 Highlights

• Earnings per Share: $0.33 adjusted vs. $0.41 expected.
• Revenue: $1.96 billion, down 1.4% YoY and below the $2.01 billion expected.
• Net Loss: $33 million (-$0.34 per share), compared to a net profit of $28 million ($0.30 per share) a year earlier.

Key Challenges

1. Nike’s Performance:
• Foot Locker’s largest brand partner, Nike, accounts for 60% of its sales.
• CEO Mary Dillon reported “softness” in Nike’s performance, further impacting Foot Locker’s results.
• Nike’s reliance on older styles and promotional pressures have weighed on its ability to drive sales.
2. Elevated Promotions:
• The footwear industry saw heightened promotional activity, which eroded margins despite improvement over last year.
• Dillon noted that promotional levels were higher than forecasted across the industry, particularly in key brands.
3. Weaker Consumer Demand:
• Lower-income consumers have pulled back on spending outside peak shopping periods, creating sharper peaks and valleys in demand.
4. Guidance Cut:
• Holiday Quarter:
• Sales are expected to decline by 1.5%-3.5%, compared to a 2% gain in the prior year.
• Comparable sales growth is forecasted at 1.5%-3.5%, below analyst expectations of 3.4%.
• Full-Year Outlook:
• Sales are now expected to decline 1%-1.5% (previously -1% to +1%).
• Adjusted EPS forecast cut to $1.20-$1.30, down from the prior range of $1.50-$1.70.

Bright Spots

1. Comparable Sales Growth:
• Foot Locker’s comparable sales rose 2.4% YoY, marking the second consecutive quarter of growth.
• Champs and WSS divisions posted positive comp sales of 2.8% and 1.8%, respectively.
2. Gross Margin Improvement:
• Gross margin improved by 2.3 percentage points, driven by fewer promotions compared to the year-ago period.
3. Store Refurbishments:
• The company is using cash reserves to finance its store refurbishment program, which is a key part of its Lace Up Plan to revitalize the business.

CEO Commentary

Mary Dillon expressed confidence in Foot Locker’s long-term strategy despite near-term challenges. She emphasized:

• The company’s relationship with Nike remains strong, with optimism surrounding Nike's new CEO, Elliott Hill.
• Progress on Foot Locker’s Lace Up Plan, which aims to modernize stores and improve customer engagement, is on track.

Market Reaction

• Foot Locker shares dropped 15% in premarket trading following the release, reflecting investor disappointment in the missed expectations and reduced guidance.

Implications for Nike

Given that 60% of Foot Locker’s sales are tied to Nike, the report raises concerns about Nike’s upcoming earnings on December 19. Nike’s performance challenges could signal broader issues in its sales strategy and reliance on specific styles, adding pressure to deliver a strong holiday quarter.

Conclusion

Foot Locker’s Q3 report underscores the difficulties facing the company in a challenging retail environment. While progress is being made in store refurbishments and margin improvements, the soft demand for Nike products and elevated promotions are significant headwinds. The reduced full-year guidance highlights the uncertainty ahead, making the holiday quarter critical for recovery efforts. Investors will be closely monitoring Nike’s performance as a leading indicator for Foot Locker’s future trajectory.