Footwear and apparel retailer Foot Locker (NYSE:FL) reported Q3 FY2023 results topping analysts' expectations, with revenue down 8.5% year on year to $1.99 billion. It made a non-GAAP profit of $0.30 per share, down from its profit of $1.27 per share in the same quarter last year.

Is now the time to buy Foot Locker? Find out by accessing our full research report, it's free.

Mary Dillon, President and Chief Executive Officer, said, "We delivered third quarter results that were ahead of our expectations as strong execution and early progress against our Lace Up plan improved conversion trends across channels. Looking forward, we are updating our outlook to reflect the momentum we have in our strategic initiatives into the fourth quarter, which includes strong results over the Thanksgiving week period, against the backdrop of ongoing consumer uncertainty. As such, we are narrowing our 2023 outlook and still expect to end the year with inventory levels flat to down slightly, as compared with the prior year."

Known for store associates whose uniforms resemble those of referees, Foot Locker (NYSE:FL) is a specialty retailer that sells athletic footwear, clothing, and accessories.

Athletic Apparel and Footwear Retailer

Apparel and footwear was once a category thought to be relatively safe from major e-commerce penetration because of the need to try on, touch, and feel products, but the category is now meaningfully transacted online. Everyone still needs clothes and shoes to go outside unless they want some curious (or horrified) looks. But this ongoing digitization is forcing apparel and footwear retailers–that once only had brick-and-mortar stores–to respond with omnichannel offerings. The online shopping experience continues to improve and retail foot traffic in places like shopping malls continues to stagnate, so the evolution of clothing and shoes sellers marches on.

Sales Growth

Foot Locker is larger than most consumer retail companies and benefits from economies of scale, giving it an edge over its competitors.

As you can see below, the company's revenue was flat over the last four years (we compare to 2019 to normalize for COVID-19 impacts) as its store count dropped.

This quarter, Foot Locker's revenue fell 8.5% year on year to $1.99 billion but beat Wall Street's estimates by 1.6%. Looking ahead, analysts expect revenue to decline 1.9% over the next 12 months.

While most things went back to how they were before the pandemic, a few consumer habits fundamentally changed. One founder-led company is benefiting massively from this shift and is set to beat the market for years to come. The business has grown astonishingly fast, with 40%+ free cash flow margins, and its fundamentals are undoubtedly best-in-class. Still, its total addressable market is so big that the company has room to grow many times in size. You can find it on our platform for free.

Number of Stores

A retailer's store count is a crucial factor influencing how much it can sell, and store growth is a critical driver of how quickly its sales can grow.

When a retailer like Foot Locker is shuttering stores, it usually means that brick-and-mortar demand is less than supply, and the company is responding by closing underperforming locations and possibly shifting sales online. Since last year, Foot Locker's store count shrank by 187 locations, or 6.7%, to 2,607 total retail locations in the most recently reported quarter.

Taking a step back, the company has generally closed its stores over the last two years, averaging a 5.2% annual decline in its physical footprint. A smaller store base means that the company must rely on higher foot traffic and sales per customer at its remaining stores as well as e-commerce sales to fuel revenue growth.

Same-Store Sales

Foot Locker's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 4.1% year on year. The company has been reducing its store count as fewer locations sometimes lead to higher same-store sales, but that hasn't been the case here.

In the latest quarter, Foot Locker's same-store sales fell 8% year on year. This decline was a reversal from the 0.8% year-on-year increase it posted 12 months ago. We'll be keeping a close eye on the company to see if this turns into a longer-term trend.

Key Takeaways from Foot Locker's Q3 Results

With a market capitalization of $2.24 billion, Foot Locker is among smaller companies, but its more than $187 million in cash on hand and near break-even free cash flow margins puts it in a stable financial position.

We were impressed by how Foot Locker beat analysts' revenue and EPS expectations this quarter, driven by better-than-expected (but still declining) same-store sales growth. We were also glad its full-year earnings guidance exceeded Wall Street's estimates. The company is showing solid business momentum as it signed a multi-year deal with the NBA to become its official marketing partner on November 16th and announced that it will expand into India in 2024. On the other hand, its earnings forecast for next quarter underwhelmed. Overall, we think this was a really good quarter that should please shareholders. The stock is up 9% after reporting and currently trades at $26 per share.

So should you invest in Foot Locker right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

One way to find opportunities in the market is to watch for generational shifts in the economy. Almost every company is slowly finding itself becoming a technology company and facing cybersecurity risks and as a result, the demand for cloud-native cybersecurity is skyrocketing. This company is leading a massive technological shift in the industry and with revenue growth of 50% year on year and best-in-class SaaS metrics it should definitely be on your radar.

Join Paid Stock Investor Research

Help us make StockStory more helpful to investors like yourself. Join our paid user research session and receive a $50 Amazon gift card for your opinions. Sign up here.