Down 19% YTD, Dump This Retail Stock Before the Holidays

While headlines about high-profile retail stock underperformers have largely focused on athletic giants like Nike(NKE) and Lululemon(LULU), they're not the only names in the space that have struggled this year. As the fourth quarter of 2024 kicks off on an extremely volatile note, here's a closer look at one consumer discretionary stock that could be set for more downside this holiday season.

About Foot Locker Stock

Valued at about $2.5 billion, New York-based Foot Locker Inc. (FL) is a specialty retailer that sells sports footwear and apparel for men, women, and kids, along with athletic equipment and sports accessories. The modestly sized stock is a component of both the Russell 2000 Index (RUT) and the S&P SmallCap 600 ($IQY).

Foot Locker has operations in 26 countries via its 2,600 retail locations, and maintains a franchise presence in the Middle East and Asia. The company operates under its eponymous brand, as well as Kids Foot Locker, Champs Sports, WSS, and atmos.

So far in 2024, FL stock has shed 19.2% of its value. While the stock is up 45% over the past 52 weeks, FL is a long-term laggard; over the past decade, the shares are down more than 53%.

Just over a year ago, in August 2023, Foot Locker crashed hard after the company issued disappointing guidance and said it would suspend its dividend. The company's last dividend payment was made in October 2023.

Foot Locker Outperforms in Q2

Foot Locker posted its Q2 results on Aug. 28, with revenue of $1.9 billion outperforming analysts' $1.89 billion estimate. The company posted a loss of $0.05 per share, narrower than Wall Street’s $0.08 per share forecast. Same-store sales were up 2.6%, reversing a year-ago decline. Cash and cash equivalents totaled $291 million at the end of the quarter, while FL's total debt was $445 million.

Gross margin for the quarter was 27.7%, up 50 basis points, while selling, general, and administrative expenses increased 130 basis points from last year on investments in technology and brand-building. During the quarter, the company opened 5 new stores while closing 31 stores and remodeling or relocating 14. Looking ahead, Foot Locker plans to close or transfer operations of 30 stores in Asia and 629 stores in Europe by mid-2025.

For the full year, management expects to be up 1% to down 1%, with comparable store sales up 1-3%. Licensing revenue is expected at $17 million they expect all comps to increase by 1-3% during the year. Adjusted earnings for the year are expected to range between $1.50 to $1.70 per share, on gross margin of 29.5% to 29.7%.

FL Stock is a ‘Bearish Fresh Pick’

Last week, Baird analyst Jonathan Komp named Foot Locker as a “bearish fresh pick,” while lowering his price target for the stock from $35 to $27.

Noting “elevated near-term risks,” including a shorter holiday shopping season this year relative to 2023, Komp explained, “With consumer spending appearing more concentrated around key events and [Nike’s] leadership change also creating near-term uncertainty, any further signs of softness in upcoming weeks could continue to weigh on investors’ confidence in the near-term outlook.”

Komp also reduced his FY24 EPS estimates for FL to $1.40, based on expectations for lower comps, while also lowering his gross margin forecast by 45 basis points.

Overall, FL stock has a consensus “Hold” rating from the 16 analysts in coverage, with only 3 recommending a “Strong Buy.”

The mean price target for FL is $29.21, about 16% higher than current prices.

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On the date of publication, Ruchi Gupta did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.