Wall Street is not taking any pressure off Foot Locker's (FL) after reporting earnings on Friday morning.
Shares of the athletic shoes and apparel retailer declined rapidly, marking its third worst drop in history by absolute dollar terms and fifth worst day in percentage loss terms.
"FL's model trajectory is back on track with its long-term target model of positive mid-single-digits same store sales and double-digit EPS growth, but elevated digital investments are limiting margin improvement," J.P. Morgan analyst Matthew Boss said. "We acknowledge FL is the market share leader in premium-priced sneakers, and footwear is expected to see better growth than apparel on a long-term basis, but elevated costs to stay close to the customer make margin improvement in the company's 5-year plan more back-half weighted."
The outlook that a long-term growth story is still years away caused Boss to slash his price target from $65 per share to $51 per share.
The company did respond with some pushback against Wall Street's weakened targets, pressing forward their belief that 2019 outlook remains on track.
"Importantly, we have a good line of sight to the flow of product for the year which gives us confidence in our outlook for 2019," a company spokesperson told Real Money. "Our updated EPS guidance reflects lower share repurchase activity in the first quarter while we remain on track to achieve comparable store sales, gross margin and SG&A rate in line with our original guidance for the year. "
Still, analysts remained skeptical specifically of the buybacks program.
"We're confused by FL's answer citing strategic/legal restrictions preventing 1Q buybacks," Credit Suisse analyst Michael Binetti said. "FL offered conspicuously little comfort to questions that it could step up buybacks in 2Q to help override the 1Q miss."
Binetti did note that there is the possibility that the muted buyback program could promote M&A activity for the retailer, a key factor that allowed him to maintain his "Outperform" rating on the stock.
Nonetheless, he trimmed his price target from an optimistic $77 per share to a more realistic $65 price target following the first quarter results.
Looming large over a turnaround from an unquestionably terrible day for Foot Locker is the probability of increased tariffs on its products.
"More than 170 footwear retailers have signed a letter from the industry's trade association, the Footwear Distributors & Retailers of America (FDRA), asking the Administration to consider a halt in raising tariffs on footwear imported from China given the negative impact to our customers from these additional costs in an industry that is already subject to meaningful tariffs," a company spokesperson said, recognizing the headwind. "We hope these new tariffs are not implemented, but if they are, we will work with our vendor partners to minimize their impact on our business."
Specific details on mitigation strategies were not offered.
The added costs to sneaker sellers could be significant as retail prices on sneakers average $48.18, according to the FDRA. After tariffs, that average is expected to jump to over $60.
Foot Locker will have the choice to either increase costs and possibly temper demand or eat the cost and squeeze margins further. Either way, it is less than an ideal situation for a company with less leverage to negotiate costs with key suppliers like Adidas (ADDYY) and Nike (NKE) .
"FL currently generates ~65% of its sales from Nike products," Boss noted. "Any strain in the company's relationship with Nike could affect the allocation of footwear and apparel it receives, disrupting its business model of selling full-priced, high-end products."
Not the best bargaining position, especially as Nike focuses on its DTC strategy to cut out ancillary costs.
It's Friday everywhere except the heart of $FL bulls.May 24, 2019