Foot Locker stock surges 13% as turnaround shows signs of life

Foot Locker’s turnaround is starting to bear some fruit. 

The sneaker giant saw comparable sales decline 1.8% during its fiscal first quarter, far better than the 3.1% drop off that analysts had expected, according to StreetAccount. 

It also reaffirmed its fiscal year guidance, which projects sales to be in a range of a 1% decline to a 1% gain, compared to a decline of 0.6% that analysts had forecast, according to LSEG. 

Here’s how the company did compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:

• Earnings per share: 22 cents adjusted vs. 12 cents expected 
• Revenue: $1.88 billion vs. $1.88 billion expected

Foot Locker’s reported net income for the three-month period that ended May 4 was $8 million, or 9 cents per share, compared with $36 million, or 38 cents per share, a year earlier. Adjusting for one-time items, including impairments associated with certain store closures and restructuring, among other costs, Foot Locker reported earnings of 22 cents per share.

Sales dropped to $1.88 billion, down about 3% from $1.93 billion a year earlier. 

For the full year, Foot Locker expects adjusted earnings per share to be between $1.50 and $1.70, ahead of estimates of $1.57, according to LSEG. 

It’s expecting comparable sales growth of between 1% and 3%, ahead of the 1.5% growth that analysts had expected, according to StreetAccount. 

“We had a solid start to the year in the first quarter, which demonstrates that our ‘Lace Up Plan’ is working,” CEO Mary Dillon told CNBC in an interview. “The reason I feel confident, we’re launching an enhanced FLX rewards program, so we have a lot of opportunity with rewards. We’re launching a revamped mobile app, which we know is a great way to drive customer engagement and commerce and we see growth opportunities… with all of our brand partners throughout the year, including returning to growth with Nike in the holiday quarter.” 

Dillon, the former CEO of Ulta Beauty, has been working to turn around Foot Locker, but those efforts have taken longer than expected. 

Sales have consistently fallen as the retailer contends with a low-income consumer, who has felt the brunt of inflation more acutely than other shoppers, and mercurial brand partners like Nike, which has pulled back on the number of new releases it was sending to Foot Locker’s stores. 

Its Champs Sports banner has also been weighing down the overall business, with comparable sales down a staggering 13.4% during the quarter and overall revenue down almost 19%.

Foot Locker had to rely on promotions to drive sales and has lost Wall Street’s confidence, with shares down about 28% year to date, as of Wednesday’s close. 

However, things are starting to look up for the company. 

In April, Nike CEO John Donahoe acknowledged that the brand went too far when it iced out wholesalers in favor of its own stores and website and told CNBC it’s “investing heavily with our retail partners” as it goes through its own turnaround effort. 

While Foot Locker’s core consumer is still under pressure from inflation, Dillon said the company’s average selling price rose during the quarter, proving that its consumers are willing to pay full price – for the right product. 

“Our consumer… this is a category that is very important to them. So when people have discretionary income, it may be limited, but you’re gonna prioritize where you spend it, right?” said Dillon. “So they’re prioritizing, but I’d say spending with purpose.”

Dillon has also been working to revamp Foot Locker’s stores, where it still does about 80% of its annual sales. She’s built new, off-mall locations, closed underperforming stores and refreshed existing locations so brands are willing to send their best products and consumers are willing to choose Foot Locker instead of shopping with a brand directly – or going to a competitor like Dick’s Sporting Goods. 

In April, the retailer unveiled its “store of the future,” which completely changes the old school Foot Locker format and will be used as a model for its store refreshes. 

“Instead of a wall of shoes, it’s really a house of brands,” said Dillon. “And I think it’s coming to life in a way that our brand partners are thrilled with. We’ve heard that from everybody.”