FL: Turnaround Set In Motion

While it appears that FL’s $0.24 headline EPS is a miss relative to the $0.26 consensus, we view this is quarter as a solid start to the impending turnaround.  So how can a miss be construed as a positive?  There are a handful of details in the release that suggest the company is setting up well for an earnings recovery, beginning now.  

Earlier today on our conference call (if you missed it let us know and we’ll provide replay info) we walked through our thesis on why we like Foot Locker and the opportunities that lie ahead.  With 4Q earnings now officially out a mere 4 hours after our call, we’re still feeling confident in our view.  While it appears that FL’s $0.24 headline EPS is a miss relative to the $0.26 consensus, we view this is quarter as a solid start to the impending turnaround.  So how can a miss be construed as a positive?  There are a handful of details in the release that suggest the company is setting up well for an earnings recovery, beginning now.  The highlights:

  • Same store sales came in at down 2.3% for the quarter, essentially in line with Street expectations.  Importantly, the release notes that sales improvement has continued through February, with comps in positive territory since the new year.  Recall that expectations here had risen throughout the quarter, as footwear in general showed a strong trend as well as growing excitement for women’s fitness shoes.
  • Inventory management kicked in this quarter, with total sales up 0.6% and inventories down 7.4%.  A marked improvement  and something that bodes well for future margins and cash flow.
  • The skeptics have been fixated on the balance sheet and the possibility of a dividend cut.  With a year-end cash balance of $589 million (net cash of $451 million) and the board’s decision to extend its share repurchase facility, the data speaks for itself.  A dividend cut is highly, highly unlikely.
  • Finally, gross margins improved by 5 bps, even as inventories were taken down.  This comes on top of a strong margin performance last year.  For those fixated on tough compares, this offers a glimpse into the potential that lies ahead.

All in, this quarter sets a base for which CEO Ken Hicks and his team will work from.  4Q was largely out of his hands anyway, especially since plans were likely set before he arrived.  However, the areas that were in his control or under his watch appear to be moving in the right direction.  It certainly helps to see a glimpse of a positive comp trend as well, but this is really a bonus to the overall progress at this time.  Merchandising changes currently in the works should take the topline even further, but for now key components of the turnaround already appear to be set in motion.

FL: Turnaround Set In Motion - 1

Eric Levine

Director