Foot Locker (FL) is an athletic shoe and apparel retailer that operates throughout North America, Europe, Asia, Australia & New Zealand, and the Middle East. In the company’s North America segment, there are six different banners--Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, and SIX:02, including each of their related e-commerce businesses, as well as its Eastbay business that includes internet, catalog, and team sales.

Q4 Earnings Recap

In late February, Foot Locker reported solid fourth quarter earnings results; however, the report failed to meet Wall Street’s expectations, and as a result, shares plunged 30%.

Total revenue rose 6.9% year-over-year to $2.3 billion, but GAAP net income fell 16% to $103 million, or $1.02 per share, due to higher costs and restructuring changes. Additionally, comparable sales were up 0.8% even compared to strong results in the prior year.

Even though Foot Locker faced supply chain issues just like many of its peers, rising demand for premium footwear and apparel helped offset that pressure and kept gross profit margin steady at above 34% of sales.

Driving the sell-off, though, was Foot Locker’s warning that Nike (NKE), its biggest supplier, will be dramatically decreasing the volume of products it sells through its partnerships. This means that Nike merchandise will represent about 55% of Foot Locker’s overall sales by late 2022, down from previous levels of over 70%.

For 2022, Foot Locker expects sales to fall by as much as 6%, with comparable sales down by as much as 10%.

Bottom Line

FL is currently a Zacks Rank #5 (Strong Sell).

Eight analysts have cut their full year earnings outlook over the past 60 days, and the consensus estimate has fallen $1.76 to $4.48 per share. Earnings are expected to slide over 42% year-over-year, and it looks like FL’s bottom-line will decline again for the next fiscal year.

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Shares are down about 30% year-to-date compared to the S&P 500’s loss of 6.4%, and FL current trades at a forward 12-month earnings multiple of 6.7X.

Nike’s decision to curtail who is able to sell Nike-branded product will definitely impact Foot Locker, and will place intense pressure on the retailer’s overall sales footprint in 2022. But Foot Locker is trying to cushion the blow, scooping up athletic companies like WSS and atmos to try and diversify its product lineup and lure customers to its stores and websites.

However, shares may continue to experience some ups and downs as inflation hits business and the retailer deals with a key part of its business model fading, so potential investors should proceed with caution.