Foot Locker (FL)

Footwear and apparel retailer Foot Locker (NYSE:FL) fell short of the market’s revenue expectations in Q1 CY2025, with sales falling 4.5% year on year to $1.79 billion. Its non-GAAP loss of $0.07 per share was significantly below analysts’ consensus estimates.

Company Overview

Known for store associates whose uniforms resemble those of referees, Foot Locker (NYSE:FL) is a specialty retailer that sells athletic footwear, clothing, and accessories.

Footwear sales–like their apparel counterparts–are driven by seasons, trends, and innovation more so than absolute need and similarly face the bigger-picture secular trend of e-commerce penetration. Footwear plays a part in societal belonging, personal expression, and occasion, and retailers selling shoes recognize this. Therefore, they aim to balance selection, competitive prices, and the latest trends to attract consumers. Unlike their apparel counterparts, footwear retailers most sell popular third-party brands (as opposed to their own exclusive brands), which could mean less exclusivity of product but more nimbleness to pivot to what’s hot.

Retailers offering athletic footwear and apparel include Dick’s Sporting Goods (NYSE:DKS), Hibbett (NASDAQ:HIBB), and believe it or not, eBay (NASDAQ:EBAY), which is an active resale marketplace for popular or rare sneakers.

A company’s long-term sales performance can indicate its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years.

With $7.90 billion in revenue over the past 12 months, Foot Locker is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale.

As you can see below, Foot Locker struggled to increase demand as its $7.90 billion of sales for the trailing 12 months was close to its revenue six years ago (we compare to 2019 to normalize for COVID-19 impacts). This was mainly because it closed stores and observed lower sales at existing, established locations.

This quarter, Foot Locker missed Wall Street’s estimates and reported a rather uninspiring 4.5% year-on-year revenue decline, generating $1.79 billion of revenue.

Looking ahead, sell-side analysts expect revenue to remain flat over the next 12 months. This projection is underwhelming and suggests its newer products will not catalyze better top-line performance yet.

Number of Stores

The number of stores a retailer operates is a critical driver of how quickly company-level sales can grow.

Foot Locker listed 2,363 locations in the latest quarter and has generally closed its stores over the last two years, averaging 6.1% annual declines.

When a retailer shutters stores, it usually means that brick-and-mortar demand is less than supply, and it is responding by closing underperforming locations to improve profitability.

Same-Store Sales

A company's store base only paints one part of the picture. When demand is high, it makes sense to open more. But when demand is low, it’s prudent to close some locations and use the money in other ways. Same-store sales gives us insight into this topic because it measures organic growth for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year.

Foot Locker’s demand has been shrinking over the last two years as its same-store sales have averaged 1.9% annual declines. This performance isn’t ideal, and Foot Locker is attempting to boost same-store sales by closing stores (fewer locations sometimes lead to higher same-store sales).

In the latest quarter, Foot Locker’s same-store sales fell by 2.6% year on year. This performance was more or less in line with its historical levels.

Foot Locker has bad unit economics for a retailer, signaling it operates in a competitive market and lacks pricing power because its inventory is sold in many places. As you can see below, it averaged a 28.3% gross margin over the last two years. Said differently, Foot Locker had to pay a chunky $71.74 to its suppliers for every $100 in revenue.

Foot Locker produced a 28.7% gross profit margin in Q1, in line with the same quarter last year and exceeding analysts’ estimates by 1.6%. Zooming out, Foot Locker’s full-year margin has been trending up over the past 12 months, increasing by 1.5 percentage points. If this move continues, it could suggest the company has less pressure to discount products and is realizing better unit economics due to stable or shrinking input costs (such as labor and freight expenses to transport goods).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Foot Locker was roughly breakeven when averaging the last two years of quarterly operating profits, one of the worst outcomes in the consumer retail sector. This result isn’t too surprising given its low gross margin as a starting point.

Looking at the trend in its profitability, Foot Locker’s operating margin decreased by 3.6 percentage points over the last year. Foot Locker’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

Foot Locker’s operating margin was negative 15.1% this quarter. The company's consistent lack of profits raise a flag.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Foot Locker broke even from a free cash flow perspective over the last two years, giving the company limited opportunities to return capital to shareholders.

Taking a step back, we can see that Foot Locker failed to improve its margin over the last year. Its unexciting margin and trend likely have shareholders hoping for a change.

Foot Locker burned through $61 million of cash in Q1, equivalent to a negative 3.4% margin. The company’s cash burn increased from $18 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Foot Locker historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 3.9%, lower than the typical cost of capital (how much it costs to raise money) for consumer retail companies.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Foot Locker’s $2.83 billion of debt exceeds the $343 million of cash on its balance sheet. Furthermore, its 24× net-debt-to-EBITDA ratio (based on its EBITDA of $105 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Foot Locker could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Foot Locker can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

It was encouraging to see Foot Locker beat analysts’ gross margin expectations this quarter. On the other hand, its revenue, EPS, and EBITDA fell short of Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $23.94 immediately after reporting.

Updated: June 16, 2025 at 10:29 PM EDT

Before deciding whether to buy Foot Locker or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Foot Locker falls short of our quality standards. For starters, its revenue has declined over the last six years, and analysts expect its demand to deteriorate over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its operating margins reveal poor profitability compared to other retailers.

Foot Locker’s P/E ratio based on the next 12 months is 18.5x. At this valuation, there’s a lot of good news priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $23.09 on the company (compared to the current share price of $23.90), implying they don’t see much short-term potential in Foot Locker.