Shares of Foot Locker (FL) plummeted 30% following the footwear and apparel retailer’s recent release of fiscal Q4 financial results, asserts John Buckingham, value-oriented money manager and editor of The Prudent Speculator.
It wasn’t the numbers from the previously completed quarter that sent traders into a selling frenzy, as the company blew away bottom-line expectations, posting EPS of $1.67, 12% better than the consensus analyst estimate.
Revenue of $2.34 billion slightly outpaced expectations, led by apparel versus footwear as supply of the latter was short and Nike worked to do more direct-to-consumer sales. CEO Richard Johnson commented, “We closed out a record year by delivering solid fourth quarter results that reflect the ongoing momentum we have built in our business in the midst of an evolving market.”
Alas, the problem was in the go-forward as the full-year outlook was dramatically below consensus expectations, due to continued changes in its vendor mix, specifically related to Nike (NKE).
On an annual basis, Nike represented 75% of total purchases in 2020 and 70% in 2021. The forecast for 2022 is that Nike will represent no more than 60%. Mr. Johnson explained, “Our journey to diversify our mix of business and expand our reach as a house of brands and banners is ongoing.”
During the earnings call, Mr. Johnson noted that there was momentum building across shoe labels including Adidas, Puma and New Balance.
The further diversification of merchandise and vendor mix also included the announcement of exclusive access to Reebok’s basketball footwear and a continued exclusive rising NBA star LaMelo Ball program with Puma.
Management also said that the company will focus on opening stores off-mall and under its key growth banners, and asserted that cost savings initiatives will be implemented that will generate $200 million of annualized savings.
All the changes have management projecting a drastic cut to the outlook, with sales for the full year down 4% to 6% vs. last year, given the Nike shift and the end to government stimulus checks. Additionally, same store sales were forecast to drop by a high-single-digit percentage.
Sounds terrible…until one realizes that the company still expects to produce adjusted EPS of $4.25 to $4.60 in fiscal 2022. The company also announced that its Board approved a 33% increase in its quarterly dividend from $0.30 to $0.40, and authorized a new share repurchase program of $1.2 billion.
While we know FL can’t repurchase all those shares immediately, long-term-oriented investors should be happy to note that the buyback amount represents a whopping 41% of the current market capitalization. With only $347 million of net of debt cash on the balance sheet, we hope management puts some of those funds to work quickly, given the massive markdown.
While we understand the concern about the reduced emphasis on Nike and the slashing taken to the near-term outlook, we strongly believe that the selloff was more than overdone.
Through a long-term lens, Foot Locker becoming less dependent on one vendor, shifting more store bases to off-mall locations and participating in new revenue streams from recent acquisitions and investments should be a positive. Additionally, more private label offerings should be supportive to margins.
Yes, we were compelled to cut our Target Price to $72 on the news, but the market’s punishment hardly fit the crime in our view and we strongly believe that averaging down on the position would be wise for those with cash in reserve and reasonable Retail and Consumer Discretionary exposure. With the increased dividend and the share price whack, FL now has massive and well-covered yield of 5.5%.