We added FL to our Best Idea Long list on the blow up last quarter with the stock around $16.50. Sentiment was hitting all time worsts into the 3Q print which ended up much better than Street feared. The company beat across the board and it looks like we have seen the bottom in both the rate of change of the P&L and earnings revisions. Revenue accelerated to down 9% from down 10% last Q, with comps improved from down 9.4% to down 8%. Gross margins were roughly steady on a rate of change basis, down 470bps this Q and down 460bps last Q. There was sequential margin improvement on the SG&A line, up 100bps this Q vs the +190bps last Q. Inventories slightly improved at +10.5% and +11% this Q and last Q on better sales trends. Revenues are guided to steady on comps in 4Q, and gross margin change is expected to improve to down 300bps in the upcoming Q. The last three quarters the company came out with big guide downs, but this quarter it basically maintained gudiance, so we’ve likely reached the bottom of EPS revisions here, as the $1.90 number for next year looks very beatable. We’re expecting the sequential improvement in revenues to continue as the company brings Nike product back into stores in size into 2024--selling higher priced goods with higher margin dollars. The steady state EBIT margin for this business is more like 5-6% not the 2% of this year. More Nike could take that margin level towards HSD%.
The FL NBA partnership is very notable (bullish) for the future of the FL Nike relationship. FL dedicated space in the press release to detail the NBA/Basketball investment. We think that is an olive branch to NKE leadership. The company spent time on the call talking about the basketball future and how focused it is on expanding and growing the category. The CCO said, “As we look ahead to this holiday season, we are enthusiastic about a number of premium footwear opportunities we are seeing resonate with our consumers, including the scaling of Nike and Jordan signature basketball models at holiday and the excitement around our new NBA marketing partnership and the storytelling platform that it brings”. This is exactly the type of message Nike wants to hear, as “storytelling” around sports and athletes is what Nike does.
On the specifics of the Nike relationship into 2024, answers were wishy washy as we expected. When asked about the Nike relationship and growth in 2024 in the Q+A, Mary Dillon said “our relationship with Nike is strong and I'd say we're very aligned on the areas that we can complement each other in the marketplace and drive growth. So you've heard us talk about basketball, kids, and sneaker culture, especially with the young multicultural customer base that Foot Locker brings to the marketplace… So Nike, as well as all of our brand partners, I think appreciate the investment that we're placing in the Lace Up plan which is simply raising our game as a retailer ecosystem… in fact I think Nike like other brand partners was pleased to hear about our partnership and they immediately partnered with us to provide one of their premier NBA partners, Kevin Durant, for our Heart of Sneakers campaign. So that said, all that said, we're still in the midst of a reset year, and as together we're looking forward to 2024 and beyond, stabilizing returning to growth. We're in the early planning stages and I'd say we'll be in a better position to get more specific as we report our fourth quarter results and talk about 2024 and beyond.” We think within the next 6 months that message will become more concrete around an enhanced Nike relationship.
The stock is ripping on this print given the ultra-bearish sentiment into the event (trough sell side ratings, peaky short interest). We think the sell side will be upgrading this an additional $10 to $15 higher. FL is a Best Idea Long.
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