Foot Locker shares drop 12% despite first comparable sales growth in six quarters

Foot Locker on Wednesday said comparable sales grew for the first time in six quarters as its efforts to refresh its stores and improve the customer experience continue to bear fruit. 

The beleaguered sneaker company's same-store sales grew 2.6% during its fiscal second quarter, far better than the 0.7% uptick that analysts had expected, according to StreetAccount. Its gross margin also expanded for the first time in more than two years. 

Despite the positive trends, the company's shares dropped about 12% in early trading.

"The Lace Up Plan is working," CEO Mary Dillon said in a press release, referencing the company's turnaround strategy. "Our top line trends strengthened as we moved through the quarter, including a solid start to Back-to-School. We were also particularly pleased to deliver stabilization in our Champs Sports banner." 

Here's how Foot Locker did compared with what Wall Street was anticipating, based on a survey of analysts by LSEG:

In the three-month period that ended Aug. 3, Foot Locker had a loss of $12 million, or 13 cents per share, compared with a loss of $5 million, or 5 cents per share, a year earlier. Excluding one-time items, Foot Locker posted a loss of 5 cents per share. 

Sales rose to $1.90 billion, up about 2% from $1.86 billion a year earlier. 

For the current fiscal year, Foot Locker largely maintained its guidance and continues to expect sales to be in a range of a 1% decline to 1% growth from the prior year – better than the 0.4% decline that analysts had expected, according to LSEG. 

Foot Locker also stood by its adjusted earnings per share guidance. It expects earnings to be between $1.50 and $1.70 – much of that range ahead of the $1.54 that analysts had expected, according to LSEG. 

Since former Ulta Beauty boss Mary Dillon took the helm of Foot Locker about two years ago, she has worked to transform the company and ensure that it stays relevant in a world where brands aren't as reliant on multibrand retailers as they were in the past. 

Dillon has worked to repair the company's relationship with its biggest brand partner, Nike, and has also taken a hard look at its sprawling, but aging, store fleet, where the company does about 80% of its sales. The company plans to spend $275 million upgrading its stores this year, and it expects to have two-thirds of its fleet remodeled by the end of fiscal 2025.

In an interview with CNBC, Dillon said the store investments are leading to increased conversion, basket size and profitability, and better performance for Foot Locker's women's business.

"The reason that we're doing it is that it is working for us, both in terms of enhancing a customer experience and a striper [store employee] experience, but also the financial returns," said Dillon. "The performance is ahead of what we thought."

In a series of new megastores Foot Locker is building in hotspots like New York City and Paris, the retailer is working hand in hand with Nike to develop some portions of the shops.

"With Nike, this has been since Day One, a high priority for me, and really building a partnership that isn't just about like, what number of shoes are we going to sell, but how do we think about using consumer insights to mutually grow our businesses together," said Dillon. "For us and Nike, it's about the places that we really connect."

Dillon has also worked to streamline costs at Foot Locker. On Wednesday, the company said it was closing its stores and e-commerce operations in South Korea, Denmark, Norway and Sweden, and will rely on a third party for operations in Greece and Romania, where it plans to expand its reach, according to Dillon. In all, 30 of Foot Locker's 140 stores in the Asia-Pacific region and 629 in Europe will be closed or go under a new operator as part of the changes. 

Foot Locker's Champs banner, which has been dragging down the company's overall performance, is also showing some signs of improvement. During the quarter, comparable sales were down 3.9%, which is an improvement from the 25.3% decline it saw in the year-ago period.

Foot Locker is also planning to move its global headquarters from New York City to St. Petersburg, Florida, in late 2025 and plans to maintain only a limited presence in the Big Apple moving forward. 

"The intent of the relocation is to further build on the Company's meaningful presence in St. Petersburg and to enable increased collaboration among teams across banners and functions, while also reducing costs," Foot Locker said in a news release. 

Dillon told CNBC the move will increase margins by 0.2 percentage point by 2027, but the decision wasn't just based on saving money.

"We've got a big center of gravity already in St. Pete ... many of our executives are there. A lot of our commercial teams," said Dillon. "We think actually bringing more people together for collaboration is going to matter and that's also part of this. It's not just about saving money. It's about, how do we really continue to build on this momentum?"

The company isn't planning to make employees relocate and Dillon, who is based in Chicago, won't be forced to become a super commuter, either.

"I am traveling, I would say, 90% of the time, to our teams around the world, and to our brand partners, and to investor meetings and to events," said Dillon. "I spend a good chunk of time in New York, I spend a lot of time in St. Pete, I spend a lot of time in Amsterdam where we have our headquarters, and visiting our brand partners. So I'm planning to keep my primary residence in Chicago, but the way that this has been working is really, I think, working pretty well so we're going to continue to do that."

As it improves stores, products, and the customer experience online and in stores, Foot Locker is managing to drive sales even as its core consumer continues to feel the pressure of consistent inflation and high interest rates – indicating that Dillon's efforts are working. 

"We're not expecting our customer to get, like, less pressured or more pressured. We're just trying to say this is a category they care about," said Dillon. "How can Foot Locker be the best to serve their needs? And I think our results are showing that that's working."

As of Tuesday's close, shares of the company are up more than 5% this year, compared with Nike's stock, which has fallen more than 21% in the same time period.

Demand has undoubtedly slowed across the retail industry, but consumers are still spending. They're just being far choosier on who they're spending with — which has made execution that much more important. 

"Our strategies are building momentum as we look to the remainder of the year," said Dillon in a statement. "I remain confident that we are taking the right actions to position the Company for its next 50 years of profitable growth and create long-term shareholder value."