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Foot Locker Breaks its Ankle, Posts $98 Million Loss for First Quarter

Friday, May 22, 2020 | Steve Anderson
Foot Locker Breaks its Ankle, Posts $98 Million Loss for First QuarterPretty much everybody who follows retail stocks likely saw it coming: this is going to be one terrible quarter for physical retail operations. Mall stores were going to be some of the biggest losers around, thanks to their primary contact point with the customer being in a place that was closed down by local, state, or federal mandate, possibly more than one at once. Foot Locker (NYSE: FL) took it on the chin recently, reporting a massive first-quarter loss of $98 million.

Like Walking Around With Only One Shoe

The numbers were disastrous for Foot Locker by pretty much any scale you care to use: objective, relative, or how-are-you-still-in-business?. That loss of $98 million for the quarter is bad enough, but given that in the first quarter of last year, the company posted a profit of $172 million, it's that much harder to bear.

Comparing the per-share earnings is almost as bad, especially when you have a grasp on the bigger numbers. On a per-share basis, Foot Locker lost $0.93 per share, and last year at this time posted earnings of $1.52 a share. It's also wildly worse than analysts expected; FactSet consensus suggested a loss of $0.12 per share, which would look like welcome news compared to what Foot Locker took.

It's All About the Numbers, Again

Much as we already discovered with Macy's, it seems Foot Locker has some really catastrophic fixed costs. Sales for the chain were down 43.4%, with a total of $1.12 billion brought in. Inventories were running higher than normal, not surprisingly; the company kept $1.46 billion on hand in inventory, which was a 20.4% increase over the same time last year.

As for stores, Foot Locker did make moves to divest itself of some weaker sales fronts; the company permanently closed 21 stores during the first quarter, but opened five new stores, and made changes—relocation or remodeling—to nine. The numbers might seem noteworthy, but on a percentage basis, it's paltry at best. Foot Locker operates 3,113 stores across 27 different countries as of May 2, reports note.

The Company Responds: Cutbacks in Some Places, Expansions in Others

So how does a business respond to news that it's just lost cash in the high-eight-figures range? For Foot Locker, it's removed its dividend from consideration altogether for the quarter and plans to evaluate company operations every quarter to figure out when it can actually put the dividend back in play, if ever.

Foot Locker is also learning a lesson that it perhaps should have learned some time ago; physical retail is suffering, and the coronavirus is killing off large parts of it. It's therefore leaning on its previous investments made toward online selling, according to word from CEO Richard Johnson.

It's also turned to the $400 million credit facility it has and borrowing nearly to the hilt, bringing in $330 million under that. Capital expenditures have also been slashed, with the 2020 forecast for such expenses dropped to $138 million, half of what it was. “Non-essential spending” has also reportedly been cut as even the CEO and senior staff is taking pay cuts.

The Problem Remains the Same

Foot Locker's problem is likely much the same as Macy's (NYSE: M) is, but on a different scale. Foot Locker managed to make a shade over a billion dollars in first quarter sales, but blew through that billion and lost another $98 million on top of it. And that's with most of its stores closed and online operations only active. It's not like they're carrying too much weight in regular hourly employees; the problem is likely one of real estate. You don't have 3,113 stores around the world without spending enormous amounts on land and power and water and such.

Sure, it's probably a good plan for a shoe store to have a online retail presence. It beats having customers order three different sizes of shoes and return two of them after figuring out what fits; return costs can be massive for online clothing retailers. Still, it's also clear that Foot Locker's overhead must be massive in its own right. Foot Locker's return to profitability is likely going to have to start with a look at where it's spending that kind of money every quarter.

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