Foot Locker (NYSE: FL) this week announced earnings results that contained plenty of good news for investors. The footwear and apparel retailer logged its best growth rate of the year during the key holiday season. But more importantly, the latest figures suggest that the chain's painful 2017 results were just a temporary setback in a positive long-term march for the business.
Let's take a closer look at the latest results:
Net income (loss)
Earnings per share
Data source: Foot Locker's financial filings. YOY = year over year.
What happened this quarter?
The company easily outperformed when compared to a brutal holiday-quarter in the year-ago period. However, Foot Locker's growth also passed management's expectations and set the retailer up for more gains ahead in 2019.
A few key highlights of the quarter:
- The reported 3% revenue uptick was held back by an extra selling week in the prior-year period. After accounting for that shift, comparable-store sales raced higher by 10% to mark a sharp acceleration over the prior quarter's 3% increase. Comps only broke back into positive territory in the second quarter after a year of declines.
- Profitability held up well, thanks to a surge of fresh product releases from suppliers like Nike . It also helped that the company entered the key selling period with lean inventory levels.
- Earnings growth was elevated thanks to charges taken in the prior-year period. Still, Foot Locker generated healthy gross and operating profits. Before-tax income improved to $713 million from $578 million for the full year. Reduced taxes contributed to an even bigger bottom-line gain.
What management had to say
Executives back in November claimed that the company was "well positioned to produce even stronger results in the all-important holiday selling season." In a press release this week, CEO Richard Johnson celebrated the retailer's execution over that time. "The fundamentals of our core business remain strong and led to meaningful improvement in our financial results, not only during the fourth quarter but throughout 2018," he said.
"This positive performance," Johnson continued, "was made possible by our team's unrelenting focus on providing compelling assortments to our customers, launching exciting collaborations with our strategic partners ... and making our stores and digital channels unique and exciting destinations."
Investors were pleased to see that Foot Locker's inventory rose at a slower pace than sales for yet another quarter, which puts the company in an ideal position to sell a high proportion of the most in-demand footwear. That lean posture, plus the accelerating demand trends through the year, gave management confidence to forecast healthy growth in 2019. Comparable-store sales should rise in the mid single digits, executives predicted, as earnings improve at a double-digit pace.
With this outlook, Foot Locker is placing more distance between itself and the tough 2017 fiscal year that saw sales shrink 3% while adjusted net profit margin fell to 6.6% of sales. The company returned to revenue growth in 2018 and managed slightly higher profitability, up to 6.9% of sales. That marked a small but important step back toward management's long-term objective of a steady 8.5% adjusted earnings margin.
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