Foot Locker Earnings Preview: Aiming for Another Record Year

Earlier this year, Foot Locker (NYSE: FL) overcame weak customer traffic during the holiday season to post a return to sales growth for the full 2018 year. The retailer benefited from the fact that inventory and demand finally returned to balance after getting far out of whack in the prior year. It didn't hurt that Nike supplied Foot Locker with a flood of innovative product releases, either.

Nike and other footwear manufacturers are increasingly making direct sales to consumers, and those moves might pressure Foot Locker's results. Still, the chain has its own aggressive digital selling plans that management believes will help deliver another year of record revenue and increasing profitability in 2019. Investors will get good data points showing whether Foot Locker can reach that goal when the company releases its first-quarter results on Friday, May 24.

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The traffic trends

The retailer's stores are clustered in and around malls, and that makes them highly dependent on foot traffic in these areas. The company also needs a steady pipeline of product releases to give customers reasons to shop at its physical locations. Both these trends worked against Foot Locker in 2017, and the result was a 5% sales slump at existing stores and sharply reduced profitability.

Foot Locker bounced right back to growth last year, though, due to two trends that the company hopes will continue lifting results in 2019. First, footwear manufacturers stepped up their innovation release schedules to support healthier traffic trends. Second, Foot Locker's digital sales accelerated, jumping to a 12% gain versus 7% in the prior year. Investors will be looking for another robust result in this sales channel on Friday, along with continued modest growth in physical stores.

Getting more profitable

The retailer notched a slight increase in gross profit margin over the past 12 months, but the 0.2 percentage point boost only won back a small portion of the 2.3 percentage point loss it reported in 2017. Management said back in early March that industry conditions should support another increase this year, and the gain might be stronger since Foot Locker entered the year with a leaner inventory position.

CEO Richard Johnson and his team are hoping to capitalize on that flexibility by selling most of Foot Locker's products at full price in 2019. Cost cuts and increasing efficiency should contribute to faster earnings growth, too, and investors will be looking for evidence of that success in an improving operating margin. Last year that key metric rose to 6.9% of sales from 6.6%. But it's still a long way from the 8.4% record Foot Locker set back in 2016.

That outlook

CFO Lauren Peters told investors they could expect another year of accelerating sales gains in 2019, with comparable-store sales rising in the mid single digits compared with last year's 1.1% uptick. Achieving that result would put the retailer back on the growth pace it was enjoying before conditions took a turn lower in 2017.

Earnings should rise at a much faster double-digit rate thanks to favorable trends, including the higher proportion of new products, reduced promotions, and a more efficient supply chain. Yet Foot Locker's biggest challenge might be navigating the shift toward online selling as its suppliers do more business directly with customers. The retailer can likely still serve a large and profitable industry niche, but the next year should tell investors a lot about whether the e-commerce shift will hurt the chain's long-term earnings power.

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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.