How did Foot Locker (NYSE:FL) stock become the laughingstock (pun fully intended) on Wall Street today? Short-term traders are looking for a sprint, not a marathon, but I invite you to look at the bigger picture. Unlike most people today, I am bullish on FL stock for the long term because the shares are exceptionally cheap, and Foot Locker’s low expectations may be a setup for future positive surprises.
Foot Locker is a well-known chain of retail footwear (usually sneakers) and sporting apparel stores in the U.S. Some folks might consider Foot Locker as a gauge of the health of America’s retail sector generally; when Foot Locker is doing well, it probably means that consumers are in a spending mood.
Unfortunately, it appears that high interest rates, along with elevated food and housing prices, have taken a toll on consumers of discretionary items such as sneakers. That’s bad news for today’s FL stockholders, but there may be a chance for patient investors to capitalize on the extreme pessimism.
Foot Locker Stock Trips and Falls
Is it just me, or has this earnings season been rife with huge post-earnings share-price plunges? Even amid this volatile backdrop, though, I must admit that I was stunned to see Foot Locker stock plummet 30% this morning.
Naturally, I used TipRanks’ tools to check Foot Locker’s second-quarter 2023 earnings results against analysts’ estimates. I figured that Foot Locker must have really fumbled the ball this time around. What actually happened, though?
As it turns out, if you were expecting a horrendous disaster of a quarter, you may be disappointed. Foot Locker’s Q2 revenue, excluding foreign currency exchange fluctuations, declined 10.2% year-over-year to $1.86 billion. That’s not a wonderful outcome, but analysts were prepared for Foot Locker to report revenue of $1.88 billion. Thus, the company didn’t miss Wall Street’s sales estimate by a wide margin.
It’s a similar story with Foot Locker’s second-quarter EPS. Foot Locker earned $0.04 per share, which is a steep drop-off compared to EPS of $1.10 in the year-earlier quarter. However, Foot Locker’s Q2 2023 EPS result was in line with the consensus estimate. So again, the market should have been prepared for Foot Locker’s results.
Bad Times Now, Good Times Later?
What really put today’s traders in a bad mood was a one-two punch of negative surprises. First, Foot Locker lowered its forward guidance. For Fiscal Year (FY) 2023, Foot Locker now expects its sales to fall by 8% to 9% year-over-year, whereas the company’s previous outlook called for a sales decline of 6.5% to 8%. Also, Foot Locker currently projects FY2023 adjusted earnings in the range of $1.30 to $1.50 per share; the company’s prior forecast called for full-year earnings of $2.00 to $2.25 per share.
Second, Foot Locker “paused” its dividend to “increase balance sheet flexibility in support of longer-term strategic priorities.” Unfortunately, there wasn’t much explanation of Foot Locker’s “strategic priorities” in the company’s quarterly press release. In any case, it appears that the market isn’t very happy about the dividend “pause.”
Now, prospective investors are left with a company that disclosed low top- and bottom-line full-year forecasts. This, to me, sounds like a low bar for Foot Locker to clear in 2023’s third and fourth quarters. Short-term traders might not want to think that far ahead, but patient investors should think about the future, not just the present.
In addition, Foot Locker should now have more capital available since the company apparently won’t be paying out any dividends for a while. Hopefully, we’ll get more clarification on exactly how Foot Locker will deploy its capital as the company seeks to pursue its “strategic priorities.”
Is FL Stock a Buy, According to Analysts?
On TipRanks, FL comes in as a Hold based on two Buys and six Hold ratings assigned by analysts in the past three months. The average Foot Locker stock price target is $24.07, implying 48.6% upside potential.
Conclusion: Should You Consider FL Stock?
To reiterate my point, think of Foot Locker’s journey in 2023 as a long-term marathon rather than as a short-term sprint. A reduced outlook for the coming quarters just might lead to expectation-beating results.
Plus, Foot Locker may have an opportunity to effectively utilize more capital since the company has ceased paying dividends. Hence, while it’s not my most confident pick of the year, investors should still consider FL stock now that financial traders don’t expect anything great from it.