Has anybody taken a look at the footwear group recently? Investors in this sector have been running away with profits. Year to date, Skechers (SKX) is up over 70% and Foot Locker (FL) is up over 30%. But shoe retailer Finish Line (FINL) tripped over the second quarter and the stock was hammered 23%. With Foot Locker in a similar line of business, was the missed quarter specific to Finish Line or was a warning of things to come?
At the end of September, Finish Line reported a horrible second quarter. The company missed the consensus estimate by $0.06. Revenue of $466.9 million rose just 7% and was almost $12 million below expectations. Same-store sales increased 1.5% vs. estimates of 4.5%. Inventories rose 11%. The company blamed the softness on its basketball offerings. Running and casual shoes were up mid-single digits. The company held firm on its guidance.
Foot Locker was immediately hit with a whole series of downgrades. Foot Locker is set to report its fiscal 2015 third-quarter earnings results on Friday and investors are holding their breath.
The consensus estimate is for $1.72 billion, up 6%, and earnings per share of $0.79. For the year, analysts think the company can produce sales of $7.1 billion.
However, looking back to the second quarter, Foot Locker didn't have the same problems that Finish Line experienced. Foot Locker beat earnings across the board. The company beat the earnings estimate by $0.10 on revenue of $1.6 billion. The better-than-expected results were driven by same-store sales of 7% and by a strong assortment of basketball footwear. Foot Locker has been working more closely with footwear makers in order to improvement its assortment. The company has also worked to develop more private label products as well. Foot Locker is in the process of closing 100 underperforming stores while opening 80 new ones.
From the results, I think it's evident that Foot Locker is taking market share from Finish Line. And this is where it gets problematic. Some investors think that because Finish Line didn't change its guidance for the end of the year -- especially after that horrible second quarter -- the company will launch an all-out sneaker war in the mall this holiday season. Foot Locker is up against tough comparisons for the remainder of the year and it would be a perfect time for Finish Line to get some retribution. Aggressive promotions and discounting could draw enough traffic away from Foot Locker and trip them up.
Other investors fear that consumers will spend all their money buying new smartphones this holiday season and won't have enough money left over for sneakers.
Whatever the case, I think it would be prudent to stay on the sidelines until it becomes clear what will happen. I'll sit on the bench and wait for Friday's report before getting back in the game.