Foot Locker’s financials for the second quarter of the year leaves much to be desired for investors. And its stock (NYSE:FL) is feeling the brunt of the negative impact. Shares of FL are down 18% so far today after the financials were released, and is still falling. Below are several highlights from the latest quarterly report.
- Comparable-store sales rose by only 0.8% when the market was expecting 3.3%. Compare this to the previous quarter of 5%, and then 10% at the end of 2018.
- Gross profitability slipped to 30.1% of sales from 30.2% and expenses increased as the retailer spent money on its e-commerce infrastructure. As a result, operating income fell to $81 million, or 4.6% of sales, from $112 million, or 6.2% of sales.
- Inventory fell 1% after accounting for currency exchange shifts, putting the company in a flexible position heading into the seasonally strong second half of the year.
- The company had to close a net of 27 stores. But 3,174 locations are still in operation by the end of the quarter.
Despite the negative earnings report, the company still remains relatively optimistic about the upcoming 2 quarters. The CEO Richard A Johnson says, “while the results of the second quarter did come in at the low of our expectations, we saw an improvement in our performance as we move through each month of the quarter.” The company is hoping earnings will pick up in the second half of 2019. Mr. Johnson owns over 80,000 units of Foot Locker stock worth over $13 million. In addition, he earns $6.3 million as Chairman of the Board, President, and Chief Executive Officer at Foot Locker.
The footwear retailer started to show signs of slowing growth in the previous quarter, and many of its products have been threatened by the trade tensions between the U.S. and China. Those tariffs and new geopolitical regulations could raise Foot Locker’s costs and force the company to sacrifice either sales growth for profitability, or vice versa. Consumers also seem to be spending less than expected so far this year. Consumer spending increased by only 0.9% in Q1 2019. Strong consumer spending is necessary for the GDP growth rate to stay between the 2% to 3% healthy range. Federal Reserve Chairman Jerome Powell said the U.S. economy is in a favorable place but faces “significant risks.” He also said that, “trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States.”
Of course the slowing economy and trade wars do not only affect Foot Locker. Other retailers are facing the same headwinds. Clothing company, Gap Inc. (NYSE:GPS) is also seeing lower stock prices. Its same store sales are lower than the previous quarter. Gap owns a few different brands such as Old Navy and Banana Republic. And all of its brands had a negative year. The company originally projected an adjusted EPS of 2.14, but has now lowered its expectations to 2.08 for the year.
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Brick and mortar apparel retailers are in a very tough spot right now. With the rise of online shopping and the cost of operating stores increase, it’s getting harder for businesses to make money in this space. And this means it will be difficult for investors to find value. The future looks uncertain for companies like Foot Locker and Gap. I would be weary about buying any stocks in this industry for the time being and focus on other growing sectors such as technology or industrial. Until Foot Locker can prove that it can transitions to become a successful online store, it will hard for it to stay relevant moving forward.
This author does not own any shares of FL during the writing of this post.