Foot Locker Affirms Its Growth Outlook As Expenses Jump

Investors were optimistic heading into Foot Locker's (NYSE: FL) first-quarter earnings report. The footwear and sports apparel retailer returned to a growth posture in the second half of 2018, and management projected another year of record sales and rising profitability for the year ahead.

In its actual results this week, the company affirmed those core operating targets while reducing its earnings outlook slightly.

More on that updated 2019 forecast in a moment. First, here's a summary of the latest results:

What happened this quarter?

The retailer posted a modest growth slowdown when compared to the prior quarter but still expanded sales at a pace consistent with management's aggressive 2019 outlook. Foot Locker spent more cash on its growth strategies, though, which reduced operating profitability.

A few key highlights of the quarter:

  • Comparable-store sales improved by 5% compared to 10% over the holiday-season quarter. Despite the slowdown, that result marked the fourth consecutive quarter of positive comps following a spate of brutal declines in 2017.
  • Gross profitability inched higher to 33.2% of sales from 29.9% a year ago, helped along by lean inventory levels and plenty of fresh product releases from suppliers like Nike.
  • Foot Locker's selling expenses rose at a much faster rate than sales, which ensured that operating margin dipped after accounting for temporary charges. The spending was tied to the chain's growth initiatives, including investments in the online sales channel.
  • Inventory growth continued to trail sales gains, keeping the chain in a lean and flexible selling position.
  • Stock repurchase spending slowed to just $2 million compared to $62 million in the prior quarter and $375 million over the prior 12 months.

What management had to say

Executives said in a press release that the key operating and financial trends all tracked closely to their expectations for the quarter. "We started the year with great energy, innovative products, and exciting customer events," CEO Richard Johnson told investors, "leading to solid top-line growth ... with strong performance across our regions, banners, channels, and categories."

Regarding the elevated expense spending, management said it did not knock the company from its full-year expense targets. "We continue investing in our digital capabilities, store fleet, and infrastructure," CFO Lauren Peters explained, "which we believe will deliver returns on both the top line and bottom line, creating shareholder value in the short and long term."

Looking forward

Executives affirmed nearly all of their fiscal-year targets. They still see sales rising in the mid-single-digits while profitability inches higher. Most of the year lies ahead, and there are key risks involving economic growth trends and trade skirmishes between the U.S. and China. Still, reaching those goals would mean a second straight year of record revenue -- a sustained turnaround following 2017's decline.

The company lowered its earnings outlook to predict per-share profit gains in the high single-digits rather than the double-digit range it had predicted back in March. This shift apparently didn't reflect weakening demand trends or the potential for a profit squeeze tied to increasing tariff rates. Instead, it was simply a result of management's slower pace in stock repurchases.

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Demitrios Kalogeropoulos owns shares of Nike. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.