Foot Locker Earnings: What to Watch

Demitrios Kalogeropoulos, The Motley Fool

Holiday season earnings reports are always important for retailers like Foot Locker (NYSE: FL), but investors have extra reasons to follow the footwear chain's upcoming announcement. The company provided tantalizing hints at a growth rebound in the prior quarter, after all, and the optimism has lifted stock returns well above the market in recent months.

That rally raises the bar for the company to meet or exceed its sales and profit targets for the year while projecting further improvements in 2019. Here's what investors will be looking for in the announcement set for Friday, March 1.

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Sales and profits

Foot Locker has posted two consecutive quarters of sales growth following over a year of painful declines. The chain is benefiting from the same favorable industry moves that have helped suppliers like Nike (NYSE: NKE), including an influx of innovative footwear launches and sharply reduced inventory levels in the U.S market.

Together, these trends allowed Foot Locker to post an encouraging operating rebound over the last six months. Sales gains inched up to 2.9% in the third quarter after breaking into positive territory in the second quarter to put the company ahead of management's rebound plan.

That success gave management the confidence to boost its full-year outlook to call for comparable-store sales gains in the low-to-mid-single digits. "We believe we are well positioned to produce even stronger results in the all-important holiday selling season," CEO Richard Johnson said in late November. The Q4 period is intensely competitive, though, so there's no guarantee Foot Locker secured the necessary customer traffic to drive those results.

As for profits, investors are hopeful that the company can continue its recent habit of showing steady improvements. Gross profit margin rose in both the second and third quarters. And while rivals likely engaged in aggressive price cutting this holiday season, there are good reasons to expect another uptick this week. Foot Locker came into the period with light inventory levels, meaning managers had plenty of room to showcase just the freshest products from Nike and other apparel and footwear suppliers.

Looking ahead

A strong holiday season that delivers sales growth for the year would be further evidence for investors that 2017's slump was just a speed bump in an otherwise positive retailing story. Foot Locker still faces major challenges ahead, perhaps including right-sizing its store footprint as sales shift more toward online channels.

These issues will put even more focus than usual on the chain's outlook for the coming year. Specifically, investors will be watching to see whether management sees revenue and gross profit margin gains extending into 2019. They'll also want assurances that Foot Locker isn't expecting a major ramp-up in selling expenses as it invests more to support online shipping fulfillment.

In that way, the retailing chain's rebounding 2018 results likely represent just the first step in a wider plan that could contain further interruptions like the one that sent adjusted net income down to 6.6% of sales in 2017 compared to management's long-term target of 8.5%.

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Demitrios Kalogeropoulos owns shares of Nike. The Motley Fool recommends Nike. The Motley Fool has a disclosure policy.