Foot Locker (FL)

Footwear and apparel retailer Foot Locker (NYSE:FL) missed Wall Street’s revenue expectations in Q4 CY2024, with sales falling 5.7% year on year to $2.25 billion. Its non-GAAP profit of $0.86 per share was 19.7% above 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.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one grows for years.

With $7.99 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 $7.99 billion of sales for the trailing 12 months was close to its revenue five 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 5.7% year-on-year revenue decline, generating $2.25 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 3% over the next 12 months. While this projection implies its newer products will spur better top-line performance, it is still below average for the sector.

Number of Stores

Foot Locker listed 2,410 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 is an industry measure of whether revenue is growing at those existing stores and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Foot Locker’s demand has been shrinking over the last two years as its same-store sales have averaged 2.7% 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 rose 2.6% year on year. This growth was a well-appreciated turnaround from its historical levels, showing the business is regaining momentum.

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate product differentiation, negotiating leverage, and pricing power.

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 28.4% gross margin over the last two years. Said differently, Foot Locker had to pay a chunky $71.56 to its suppliers for every $100 in revenue.

Foot Locker produced a 29.7% gross profit margin in Q4, up 3 percentage points year on year and exceeding analysts’ estimates by 2.4%. Foot Locker’s full-year margin has also been trending up over the past 12 months, increasing by 1.2 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).

Foot Locker was profitable over the last two years but held back by its large cost base. Its average operating margin of 1.5% was weak for a consumer retail business. This result isn’t too surprising given its low gross margin as a starting point.

Analyzing the trend in its profitability, Foot Locker’s operating margin might fluctuated slightly but has generally stayed the same over the last year, meaning it will take a fundamental shift in the business to change.

In Q4, Foot Locker generated an operating profit margin of 3.6%, up 2.3 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Sadly for Foot Locker, its EPS declined by 22.7% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.

In Q4, Foot Locker reported EPS at $0.86, up from $0.38 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Foot Locker’s full-year EPS of $1.36 to grow 27.1%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and 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, an encouraging sign is that Foot Locker’s margin expanded by 3.2 percentage points over the last year. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability was flat.

Foot Locker’s free cash flow clocked in at $192 million in Q4, equivalent to a 8.5% margin. This result was good as its margin was 3.8 percentage points higher than in the same quarter last year, building on its favorable historical trend.

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 4.9%, 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 $2.78 billion of debt exceeds the $401 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $368 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.

We enjoyed seeing Foot Locker beat analysts’ gross margin and EPS expectations this quarter despite a revenue miss. On the other hand, its full-year EPS guidance missed. Overall, this was a mixed quarter. The stock traded up 2.4% to $17.78 immediately after reporting.

Updated: May 22, 2025 at 10:37 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Foot Locker, you should also grasp the company’s longer-term business quality and valuation.

We cheer for all companies serving everyday consumers, but in the case of Foot Locker, we’ll be cheering from the sidelines. First off, its revenue has declined over the last five 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 declining physical locations suggests its demand is falling.

Foot Locker’s P/E ratio based on the next 12 months is 13.8x. This multiple tells us a lot of good news is priced in - we think there are better investment opportunities out there.

Wall Street analysts have a consensus one-year price target of $21.47 on the company (compared to the current share price of $23.82), implying they don’t see much short-term potential in Foot Locker.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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