Here’s How Foot Locker Plans to Rally After a Weak Quarter

The second quarter marked another challenging earnings period for Foot Locker Inc.

The New York-based specialty athletic retailer logged a 31.8% drop in profits to $60 million, or 66 cents per share — below Wall Street’s estimates of 67 cents a share. Although comps climbed 0.8%, revenues fell 0.4% to $1.77 billion, versus consensus bets of $1.82 billion. Shares subsequently closed down nearly 19% to $34.

But Foot Locker is banking on brick-and-mortar, resale and other investments to jump-start sales. It poured about $36 million into its business during the quarter, the company said during an investor call on Friday.

In the past three months, the athletic chain has opened 10 new locations, including two “Power Stores,” as well as remodeled and relocated 35 outposts. (It also closed 37 stores during the period.)

In March, Foot Locker also introduced its own innovation and incubation initiative dubbed Greenhouse to help fuel emerging brands as well as a new membership program called FLX. It noted solid performances in its men’s basketball, running and court styles during the second quarter. Moreover, the retailer’s women’s footwear business, which got a boost from Foot Locker’s new shop-in-shop at Champs Sports, remained a highlight.

“The fact that our comp performance improved as we move through each month of the second quarter is a positive sign,” chairman and CEO Dick Johnson said in the call. “We believe that with the company’s strong financial position, our strategic relationships with our vendor partners and the connection we have with our customers, we are well positioned to build positive momentum in the back half of 2019.”

The company has continued to reiterate its four strategic imperatives (first announced at its investor day in March): elevating customer experience; investing in long-term growth; driving productivity; and leveraging the power of its talent pool, made up of 40,000 employees in 27 countries.

Foot Locker has also relied on its partnerships with big-name sports giants including Nike and Adidas. In collaboration with the former, the retailer  recently opened its digitally driven “Power Store” in New York’s Washington Heights neighborhood. It also teamed up with the German brand to launch a new “Passport Pack” of Berlin- and Tokyo-themed sneakers.

Early this year, Foot Locker entered into an aggressive spree of investments in apparel and footwear startups. In late February, the firm announced that it had put $12.5 million toward children’s apparel company Rockets of Awesome, serving as the lead investor in a Series C round worth a total of $19.5 million. The move came less than three weeks after it said it was making a $100 million strategic investment in GOAT Group, which operates sneaker marketplaces GOAT and Flight Club.

“We’ve got a holistic view of the sneaker market,” explained Johnson. “As we work with our vendor partners and thrive on the scarcity model, I think that does in fact help fuel the secondary market… It’s probably the perfect supply demand sort of model.”

Within the last year and a half, Foot Locker has also thrown financial support behind three other businesses: a $2 million strategic investment in Pensole Inc.; $3 million toward a Series Seed II investment round in children’s lifestyle brand Super Heroic; and a $15 million Series A contribution toward women’ luxury activewear maker Carbon38. (It added another $10 million to the latter this year.)

Ahead of the company’s earnings report today, Wedbush Securities analyst Christopher Svezia reiterated his outperform rating on the stock, pointing to a product pipeline of largely outperforming brands (including Nike, Puma and Vans) as well as clean inventory levels to support full-price sales.

“After a choppy start to the year, [Foot Locker] management should assert confidence in the story given strong consumer demand for its products, the loyalty rollout, planned moderation in SG&A pressure and resumption of share repurchase activity,” Svezia wrote, putting the retailer’s 12-month price target at $64.00.

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