Foot Locker (FL) Sustains Earnings Surprise Momentum in Q2

Solid comparable-store sales growth and cost containment efforts helped Foot Locker, Inc. FL to continue with its positive earnings surprise streak for the eighth consecutive quarter. The company's second-quarter fiscal 2015 earnings of 84 cents a share surpassed the Zacks Consensus Estimate of 69 cents and surged 31.3% from the prior-year quarter figure of 64 cents. In the trailing four quarters (including the quarter under review), the stock outperformed the Zacks Consensus Estimate by an average of 11.3%.

Despite a 9.6% jump in comparable-store sales, Foot Locker's total sales increased only 3.3% year over year to $1,695 million, as foreign currency headwinds hurt sales by over $100 million. Excluding the negative impact of foreign currency fluctuations, total sales rose 9.9%. Total sales also came ahead of the Zacks Consensus Estimate of $1,664 million. In the trailing four quarters, this Zacks Rank #2 (Buy) stock beat the Zacks Consensus Estimate by an average of 1.1%.

The company's stellar performance was backed by effective implementation of its operational and financial initiatives. Management believes that by continually exploiting opportunities like children's business, shop-in-shop expansion in collaboration with its vendors, store banner.com business, store refurbishment and enhancement of assortments, Foot Locker is likely to benefit in the long run. International expansion, especially in Europe, is another growth catalyst. Europe, Canada and the Asia Pacific regions witnessed double-digit comparable sales growth. The company is also developing its E-commerce platform.

Management now projects a mid single-digit increase in sales in the third quarter as well as in the second half of the fiscal year. Based on the current sales trend, Foot Locker now expects to attain double-digit growth in earnings per share in the third and fourth quarters.

Gross margin expanded 60 basis points to 32.6% of sales, whereas the selling, general and administrative expense rate contracted 140 basis points to 19.5% during the quarter.

Store Update

During the quarter, Foot Locker opened 21 new outlets, remodeled or relocated 65 outlets, and shuttered 21 outlets. At the end of the second quarter, the company operated 3,419 outlets across 23 countries in North America, Australia, New Zealand and Europe. Apart from these, there are 48 franchised Foot Locker stores in South Korea and the Middle East. Germany and Switzerland too have 27 franchised Runners Point and Sidestep stores.

Other Financial Details

Foot Locker ended the quarter with cash, cash equivalents and short-term investments of $970 million, long-term debt and obligations under capital leases of $130 million, and shareholders' equity of $2,579 million.

During the quarter, the company bought back about 1.2 million shares worth $76 million and paid total dividend of $35 million. The company incurred capital expenditure of $58 million. During fiscal 2015, management now estimates capital expenditure of $235 million.

Other Stocks to Consider

Some other well-placed stocks in the retail sector are Aéropostale, Inc. ARO, American Eagle Outfitters, Inc. AEO and DSW Inc. DSW. Each of these stocks carries the same Zacks Rank as Foot Locker.

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