The way Foot Locker, Inc. (NYSE: FL) stock opened on Friday, you’d have thought Michael Jordan agreed to be a pro bono spokesperson for the company. Instead, Foot Locker shares jumped 25 percent in early trading after reporting falling year-over-year revenue, same-store sales, and earnings per share.
[See: 7 of the Best Stocks to Buy for 2018.]
A closer look at Foot Locker’s third quarter: How is this possible? Good question. The simple answer is that while Foot Locker saw declines across the board in the three months ended in October, Wall Street was expecting a much more severe fall from grace. Revenue fell 0.8 percent to $1.87 billion, better than the $1.83 billion consensus. Adjusted EPS came in at 87 cents, well above the Street’s 80-cent forecast, and same-store sales — the most-watched brick-and-mortar retail metric of all — fell 3.7 percent, considerably better than the 4.6 percent decline expected by FactSet analysts.
Important to remember when putting Friday’s gains in context, Foot Locker shares had been suffering through an absolutely miserable 2017, with shares down more than 55 percent on the year before Friday’s earnings surprise. Shares are still down 43 percent this calendar year even after the 25 percent rally.
Fiscal 2018, which ends in January, has been a string of bad news for shareholders: Fiscal first-quarter results were sharply lower than expected, foreshadowing difficulty that would continue throughout the year. The quarter before, same-store sales growth was chugging along at a 5 percent clip, but edged up just 0.5 percent that quarter. Foot Locker’s fiscal second quarter brought more woes, with same-store sales plunging 6 percent.
CEO Richard Johnson has blamed the company’s shortcomings on everything from the IRS to a lack of innovative new products for it to sell, but the truth is, Foot Locker is a middleman in a world where middlemen are increasingly getting cut out and mall traffic is waning. Nike’s ( NKE) deal with Amazon.com ( AMZN) to sell directly through Amazon marked a major win for e-commerce and a major loss for Foot Locker and other sporting goods retailers.
Where to go from here. FL stock deserves the Wall Street love today. In truth, its shares were probably a little too beat down. And one of the most rewarded short-term stories by the stock market is the company that goes from hated to below average, which is what Foot Locker seems to be doing. A nice old fashioned short squeeze, where those shorting the stock are forced to buy it back to cover their position after good news drives the stock price up, could be in play as well.
That said, betting that FL stock has bottomed is still a risky trade; shares could still be a long-term value trap. Sure, it trades for just 10 times earnings and pays a 3.8 percent dividend, but if same-store sales and mall traffic continue to fall while direct-to-consumer sales rise, Foot Locker is a long-term loser.
[See: 9 Ways to Spot Value Trap Stocks.]
The e-commerce trend is bigger than Foot Locker itself. FL can keep posting lower-than-expected declines, but over the next few years, it will have to do something truly magical to actually grow.
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Why Foot Locker, Inc. (FL) Big Gains Won’t Last Long originally appeared on usnews.com
