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Foot Locker's Q3: Slowing Sales

Investors had high expectations heading into the third-quarter earnings report from Foot Locker (NYSE: FL). Consumer spending trends appear to be spiking in its niche, especially on premium footwear and apparel. And Wall Street was hoping for a bright forecast for the critical fourth quarter that is now underway.

The retailer's update for the quarter ended Oct. 30 included good news on the growth and earnings fronts even though supply-chain issues threaten to limit some of its sales gains over the holiday season. Let's dive right in.

Image source: Getty Images.

Getting to growth

Sales are still growing although more modestly compared to booming results a year ago. Comparable-store sales were up 2% in the quarter over the year-ago period vs. an 8% increase in 2020.

Total revenue is up 13% on a two-year basis, which smooths out the volatility associated with pandemic store closures. Yet that rate of increase marked a slowdown from the prior quarter when Foot Locker enjoyed a 28% two-year revenue spike.

Executives said they were happy with the growth despite challenges in securing enough inventory and booming demand from a year ago. "These...results were against a robust back-to-school season from last year," CEO Richard Johnson said in a press release, "and in spite of the ongoing supply chain challenges."

Better profits

The news was much better around profitability. Foot Locker had no trouble passing along higher prices to shoppers, who are increasingly opting for premium footwear. Gross profit margin jumped to 35% of sales from 31% a year ago, allowing operating income to improve to 9% of sales from 8%.

Adjusted net income rose to $201 million from $128 million a year ago and came in better than investors had expected.

FL Operating Margin (TTM) data by YCharts

On the downside, the company's debt burden is rising thanks to the recent acquisition of two other shoe retailers -- atmos and WSS -- for a total of $1.1 billion. Cash flow slowed too as the company spent more cash on inventory ahead of the holiday shopping season. These two factors add a bit more financial risk to the business in exchange for laying the groundwork for faster growth ahead in 2022.

Looking to the holidays

Foot Locker says it is in a good inventory position heading into the critical fourth quarter. The chain is doing its best to capitalize on strong demand trends in the industry and the flood of popular, new product releases from suppliers like Nike -- and so profitability metrics are improving.

However, transportation issues are likely to affect growth just as they did this past quarter. "We expect global supply chain constraints to persist," CFO Andrew Page said. That means investors might see another period of modest sales gains this quarter paired with rising profit margins.

While that's not terrible news for shareholders, it does imply weaker returns for a while. Investors looking for higher-quality retailing growth might want to look elsewhere in the industry, including such names as Lululemon Athletica.

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Demitri Kalogeropoulos owns shares of Nike. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.


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