Shares of shoe retailer Foot Locker (NYSE: FL) raced higher on Thursday after the company reported financial results for the first quarter of 2024. And while results weren’t necessarily impressive, they weren’t as bad as some reports in recent quarters. That’s really all this stock needs right now and it’s why Foot Locker stock was up a whopping 24% as of 11:10 a.m. ET.
Jumping over a really low bar
Allow me to set the stage: Investors have really low expectations for Foot Locker right now. Generally speaking, a price-to-sales (P/S) valuation of 1 is cheap and it’s where Foot Locker stock traded 10 years ago. Fast forward to 2024, and shares of the shoe retailer have hovered around a P/S ratio of 0.2 — 80% cheaper than its valuation a decade ago.
As shoe companies have increasingly sold directly to consumers, Foot Locker has had to lower prices to stay in the picture. But lowering prices lowers profit margins, which is why the stock has trended down in recent years.
To be clear, Foot Locker’s situation doesn’t seem to have materially improved. The company’s Q1 same-store sales fell by nearly 2% even though it lowered prices. Lowering prices led to a lower gross profit margin. And it had just $8 million in net income compared with net income of $36 million in the prior-year period.
That said, Foot Locker’s management did reaffirm its guidance for the full year. In 2024, it essentially expects sales to be flat year over year and it expects its gross margin to slightly improve from 2023 thanks to fewer price reductions. Given the low expectations going into the report, this was all the company needed to do to excite investors.
Is Foot Locker positioned for long-term success?
Foot Locker’s management plans to invest significant money to remodel stores and stay relevant. And it says that early feedback is positive.
I’ve long recognized that Foot Locker stock is cheap. But I haven’t purchased shares because there’s more to investing than this. Businesses also need to be positioned for long-term success and given how easy it is for shoe companies to sell direct these days, I’m not so sure about that when it comes to Foot Locker.
Any long-term investor who takes advantage of the still cheap valuation for Foot Locker stock today would need to believe that management is making the right moves for long-term relevance.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Foot Locker. The Motley Fool has a disclosure policy.
Why Foot Locker Stock Raced Higher Today was originally published by The Motley Fool
From: Yahoo.com
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