Foot Locker Dives as Investors Brace for ‘Several Years of Pain’

  • Shares suffer worst rout since 2008 after results disappoint
  • CEO Dick Johnson says retailer is ‘working quickly to adjust’

Foot Locker Inc. reported second-quarter profit, sales, and margins that fell short of expectations, sending shares plummeting as much as 28 percent. Bloomberg Gadfly's Sarah Halzack examines the results on 'Bloomberg Markets.' (Halzack is a Bloomberg Gadfly columnist. The opinions expressed are her own.) (Source: Bloomberg)

Foot Locker Inc. suffered its worst stock decline since the depths of the last recession after a bleak outlook renewed concerns that the industry’s growth streak has come to an end.

Shares of the footwear chain fell as much as 28 percent in the wake of results that were weaker than expected by most every benchmark: profit, sales and margins. Foot Locker also forecast continued sales declines over the rest of 2017, with Chief Executive Officer Dick Johnson citing sluggish demand for top brands, including Nike Inc.’s Jordan and Adidas AG’s Stan Smith.

Foot Locker’s same-store sales -- a key benchmark -- fell for the first time since 2010. That sent ripples across the sporting-goods industry on Friday, dragging down shares of the field’s biggest companies.

“We certainly didn’t see the business dropping off as much as it did,” Johnson said on a call with analysts. In May, when Foot Locker reported disappointing first-quarter results, Johnson said the company had rebounded from a rough February with robust sales gains in March and April.

The results follow disappointing numbers from others in the industry, including Under Armour Inc., Hibbett Sports Inc., Dick’s Sporting Goods Inc. and Cabela’s Inc. That’s a sign that the broader field may be headed for “several years of pain,” Quo Vadis Capital analyst John Zolidis said in a research note.

“The consumer has moved on to other things,” Zolidis said.

The falloff doesn’t bode well for the back-to-school shopping season, which is in full bloom right now, according to Matt Powell, an analyst for NPD Group. Total U.S. athletic footwear sales continued to slide in July, falling 5 percent, according to NPD data collected from retailers.

Sales in July for Nike, which has only reported results through May, declined at a high-single-digit percentage rate, NPD said. And the company’s Jordan and Converse brands suffered an even steeper drop.

Under Armour, which has only disclosed results through June, experienced a double-digit decline last month, according to the researcher. Skechers USA Inc., which has also only reported through June, saw shoe revenue in the U.S. fall at a high-single-digit rate.

Hispanic Shoppers

The U.S. sneaker slowdown can be chalked up to a slew of problems, according to Powell. Basketball, once the industry’s stalwart, continues to be weak. And the classic-looking sneakers -- led by Adidas lines such as Stan Smith -- have peaked, with the overall category falling 8 percent in July. There’s also a material decline in sneaker sales to Hispanics. The theory is that they’re shopping less -- a trend highlighted by Target’s CEO -- amid fears over increased immigration enforcement under President Donald Trump.

“Foot Locker, being the largest sneaker retailer in the U.S., is reflecting the malaise we have seen all year,” Powell said.

Shares of Foot Locker fell as low as $34.41, marking the biggest intraday drop since November 2008. Even before the tumble, the stock had already lost a third of its value this year.

Foot Locker is struggling to adapt to a shift in consumer preference that includes a penchant for online shopping over visiting stores. Many consumers also are spending on experiences -- such as trips and eating out -- over physical goods.

The change has dented the value of retailers across the spectrum, with sporting-goods vendors getting hit especially hard. Nike, Under Armour Inc., Adidas and Amer Sports Oyj also declined after Foot Locker and Hibbett reported disappointing results.

Lack of Innovation

In delivering the earnings, Foot Locker’s Johnson said “some recent top styles fell well short of expectations and impacted this quarter’s results.” He also cited a lack of “innovative new products” and a compelling narrative that connects with young shoppers. He pointed to Adidas’s partnerships with musicians Kanye West and Pharrell Williams as earlier successes.

But he sought to downplay Nike’s recent decision to start selling products on Amazon.com Inc. Johnson said he expects Nike and other major vendors to only sell low-price sneakers there, making the move less of an “imminent threat.”

Foot Locker reported adjusted earnings of 62 cents a share, far worse than Wall Street’s average forecast of 90 cents. Comparable-store sales declined 6 percent, well below the expectation of 1.7 percent expansion, according to Consensus Metrix. Sales also fell short of forecasts.

The main problem was a lack of hit shoes, Foot Locker said. Even as unit sales declined last quarter, average selling prices rose, noted Chief Financial Officer Lauren Peters.

That means consumers are still willing to open their wallets “if they find a cool product,” she said.

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