Foot Locker (NYSE:FL) Is About To Sprint Higher

The Foot Locker Rebound Has Been A Long Time Coming

Foot Locker NYSE: FL began a refocusing effort last year that has taken quite some time to unfold. To be fair, the pandemic couldn’t have come at a worse time for the company. High expectations built into the efforts set the stock up for a big fall when the February correction started. 

Part of the plan was a partnership with Nike, a partnership that would turn Foot Locker into Nike “Power” stores, boost both companies’ eCommerce presence and, theoretically, help them both compete with Amazon. The new store formats might not bear fruit but the eCommerce aspect is driving sales to new highs.

Foot Locker Updates The Outlook, Then Beats It

When Foot Locker gave its preliminary results two weeks ago it took the analysts community by surprise. The consensus was not good, aside from an increase in ad-spending, the unknown impact of the COVID-19 pandemic weighed heavily on their minds. The consensus, then, was that earnings would fall under the pressure of store closures and increased ad spending but they couldn’t have been more wrong. The rebound has been strong and the company’s shift to eCommerce underpinned the results.

The top-line revenue came in at $2.08 billion, up 17.5% from the previous year and $10 million ahead of guidance. At the comp level, sales rose a slightly more robust 18.3% led by the digital channels but no specific information was given. Based on what I’ve seen from other retailers, eCommerce sales are likely up 100% to 200% over the same time last year, maybe higher.

On the bottom line, GAAP earnings fell short of consensus by $0.17 but there are some mitigating factors. The first is that Foot Locker spent $19 million in one-time charges related to restructuring efforts. The second is the company spent $18 million on damages related to “civil unrest”. When adjusted for those items earnings of $0.71 are $0.02 above target and well above the analyst’s prediction of -$0.52.

Foot Locker Reinstates The Dividend

Foot Locker suspended its dividend earlier this year as an effort to preserve capital. Now, with business rebounding much stronger than anyone expected and the balance sheet in good shape, the board has decided to reinstate it. The new payout is 62% smaller than it used to be but still yields a nice 2.0%. Based on the company’s cash position, incredibly low levels of debt, and outlook for earnings the odds of an increase later this year or early next year are very high.

"Looking ahead, we believe the Company is well-positioned financially to maneuver through the evolving COVID-19 pandemic. As a first step, the Board reinstated the dividend at a cautious but meaningful level to begin returning cash to shareholders.” Lauren Peters, Executive Vice President, and Chief Financial Officer.

The Technical Outlook: It’s Time To Buy Foot Locker

Shares of Foot Locker are up more than 8.0% in the premarket action due to a combination of factors. The earnings report is just the tip of the iceberg, the dividend is the bigger catalyst, and both are compounded by a relatively high 8.5% short interest and incredibly low valuation. With today’s pop, price action is now above the short-term moving average and will likely move higher in the near, short and long-term.

The first hurdle will be the $31.50 level. That’s the bottom of an open gap formed earlier this year when the Foot Locker was downgraded and it’s been giving resistance ever since. Once that level is cleared, a move up to the $35.30 level is next. Possible catalysts for higher prices include positive retail sales data, another round of economic stimulus, analysts upgrades, company updates, and/or a dividend increase. All of which are very possible in the 2nd half of the year.