What Happened:

Shares of footwear and apparel retailer Foot Locker (NYSE:FL) fell 5.5% in the afternoon session after the major indices pulled back with the Nasdaq down 1.1%, while the Dow and S&P 500 fell 0.9% and 0.8% respectively. Bond yields increased as traders lowered expectations that the Federal Reserve would cut interest rates in June 2024. 

Also, it's likely investors are taking profits to wrap up the earnings season. Macro data remained mixed with the PCE (personal consumption expenditure - the Fed's favourite inflation gauge) price index coming in inline with market's expectations at 2.5% for the month of February 2024 as reported on March 29, 2024. The data showed that inflation remained sticky. With inflation yet to come back down to the Fed's 2% target, the data is likely to raise renewed skittishness about the Fed's pace of rate cuts in 2024. 

Separately, Foot Locker's peer, PVH, reported fourth-quarter results and provided full-year earnings forecast, which fell well below Wall Street's expectations. PVH blamed the macro, especially in Europe. On the other hand, revenue and EPS exceeded expectations during the quarter.

As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Foot Locker? Access our full analysis report here, it's free.

What is the market telling us:

Foot Locker's shares are somewhat volatile and over the last year have had 27 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The previous big move we wrote about was 27 days ago, when the stock dropped 24.2% on the news that the company provided a full-year earnings forecast that missed analysts' expectations by a large amount, and this is dragging the stock down. Gross margin also declined. In addition, the company continued to close some of its stores, reducing its footprint. 

On the other hand, revenue and EPS outperformed Wall Street's estimates. Looking ahead, the company extended the timeline for achieving some of its long-term profitability goals, adding, "We maintain conviction in the longer-term earnings potential that our Lace Up plan will generate and reiterate the 8.5-9% EBIT margin target communicated at our March 2023 Investor Day. Given our lower starting point exiting 2023, we expect a two-year delay in achieving that goal and now see reaching that target by 2028." Overall, it was a weaker quarter for Footlocker, with the weaker guidance likely to raise concerns among investors.

Foot Locker is down 15.9% since the beginning of the year, and at $25.97 per share it is trading 38.3% below its 52-week high of $42.09 from April 2023. Investors who bought $1,000 worth of Foot Locker's shares 5 years ago would now be looking at an investment worth $428.19.

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