Foot Locker (FL) stock isn't finding firm footing on Friday morning after an earnings miss for the April-ended quarter.
Shares of the New York-based footwear retailer shot downward double digits as the print hit the Street in pre-market trading, before building to a more modest loss. The implied open for the stock has fallen below $50 per share, which would be the lowest in nearly six months.
The share reaction is largely driven by the top and bottom line misses for the first quarter wherein the company reported $1.52 in earnings per share, well shy of the $1.60 Street consensus forecast, and revenues that came up about $30 million shy of expectations.
While comparable sales were relatively strong at a 4.6% increase year over year and margin expanded for the retailer, many analysts were hoping for more as product cycles from key partner Nike (NKE) came through and markdowns on products could be reduced.
"We started the year with great energy, innovative products, and exciting customer events, leading to solid top-line growth in the first quarter with strong performance across our regions, banners, channels, and categories," said CEO Richard Johnson. "Based on the momentum we have underway, we feel confident that the updated strategic imperatives we introduced at our Investor Day in March position us to deliver on our long-term goals."
As such, the company foretasted full-year earnings growth in the "high-single digit" range which, while weaker than the compared to a double-digit advance it forecast in February, is not overwhelmingly bearish. Still, analysts noted that the maintenance of the still positive guidance is largely motivated by buybacks and factors outside of business strength.
Spending for Growth
Another point of contention for the company is the fact that it is continuing to increase SG&A expense despite closing nearly 100 stores over the past year.
The company noted that the SG&A expense rate increased to 20% from 19% in the first quarter as a result of digital capability and infrastructure investments.
"The team did an excellent job positioning the Company to leverage its mostly fixed occupancy and buyers compensation expenses during the first quarter," CFO Lauren Peters said. "To build on this momentum and create even deeper connections with our customers, we continue investing in our digital capabilities, store fleet, and infrastructure, which we believe will deliver returns on both the top-line and bottom-line, creating shareholder value in the short and long term."
The continued investment could cut into the company's margin as the year progresses and could add another headwind into the back half of the year.
The spending on digital is also a question mark for the company as key partners like Nike and Under Armour (UAA) invest in their own direct to consumer offerings.
Of course, the elephant in the room in terms of margins and consumer demand into the second half of the year will surround tariffs and their impact on retailers like Foot Locker.
FL joined a host of U.S. companies in the shoe and sports apparel business, including Nike and Adidas (ADDYY) , in signing a letter sent to President Donald Trump urging him to reconsider placing tariffs on footwear made in China and imported into the United States, calling the levies a "catastrophic" move that will cost U.S. consumers $7 billion a year for the industry uniquely reliant on Chinese production.
"There should be no misunderstanding that U.S. consumers pay for tariffs on products that are imported," the letter read. "As an industry that faces a $3 billion duty bill every year, we can assure you that any increase in the cost of importing shoes has a direct impact on the American footwear consumer."
"It is an unavoidable fact that as prices go up at the border due to transportation costs, labor rate increases, or additional duties, the consumer pays more for the product," the letter continued. "This significant tax increase, in the form of tariffs, would impact every type of shoe and every single segment of our society."
Commentary from management on a plan to mitigate this impact will be pivotal for the stock's trajectory after its earnings conference call. The call is scheduled for 9 a.m. ET and is available here.