Foot Locker (FL) CEO Mary Dillon must be second-guessing her decision to take the top job at the sneaker retailer last August. Since joining the company, the sneaker retailer’s shares have lost more than half their value.
On Wednesday, FL stock got taken to the woodshed, losing 28% of its value in one terrible day of trading. Approximately 45.4 million Foot Locker shares were traded on Wednesday, 9x the 30-day average. With about two hours in on Thursday, it’s almost 2x the average.
Only today, the share price is up, not down for a change. However, thanks to a bad earnings report and Nike’s (NKE) terrible August correction -- its stock is down more than 10% this month -- it’s highly likely that things could get worse before they get better for Foot Locker stock.
As I write this, despite gaining more than 8% on the day, its share price is at a 12-year low.
It’s hard to imagine that Dillon would walk away from the challenge she took on a year ago. While the hole dug by its share price is deep and wide, the sneaker retailer’s unusual options activity could provide some relief.
The Bad News
There’s no question Wednesday’s Q2 2023 results were a disaster. It missed on both the top and bottom lines. Worse still, its guidance was like kryptonite to Superman. Not good.
Six points made by Foot Locker in yesterday’s earnings report sent investors scurrying for the exits.
1. Revenue was $1.86 billion, $20 million shy of the analyst estimate.
2. Same-store sales fell 9.4% over last year’s second quarter.
3. Earnings per share was $0.04, a one-cent miss.
4. It expects same-store sales to fall 9.5% (midpoint of its guidance) in 2023, 125 basis points higher than its previous estimate.
5. It expects 2023 EPS to be $1.40 (midpoint), down 34% from its previous estimate.
6. Foot Locker paused its dividend after it pays out its October dividend of 40 cents.
It’s hard to decide which of these six points is the worst. A car wreck doesn’t correctly describe what happened to its business during the second quarter.
It’s safe to say Mary Dillon has had her “We’re not in Kansas anymore” moment. Shoe retail is not cosmetics retail.
Dillon’s Response
What do you say when you’re delivering a dud? Not much, except we’re pushing forward with our business plan.
“We remain committed to our Lace Up plan as introduced at our March 2023 Investor Day, and we are encouraged by the progress we are making against our strategic priorities heading towards the holiday season,” Dillon stated in its Q2 2023 press release.
“To ensure that we have the flexibility to continue to fund our strategic investments appropriately, we are pausing our quarterly cash dividend beyond our Board's recently-approved October payout.”
With 94.2 million shares outstanding, it will save $38 million per quarter. That’s $152 million on an annualized basis.
In 2022, it used $112 million in free cash flow, down $569 million from 2021 and $1.02 billion from 2020. In 2023, it will likely use five times 2022’s free cash flow.
It finished the second quarter with just $180 million in cash and a net debt of $2.85 billion. As of Jan. 30, 2021, it had $1.68 billion in cash and a net debt of $1.51 billion.
It’s no longer just a matter of suspending dividends, and all will be well. The retailer’s financial situation is much worse than long-time shareholders probably realized.
Wednesday’s report was a major wake-up call. No wonder Nike’s stock fell on the news.
Is There a Play?
There’s always a play. It’s whether you have the stomach for it.
As I said, it’s trading at its lowest level since August 2011 and well below its all-time high near $80 in 2017. Oh, that seems so long ago.
In yesterday’s unusual options activity, there were five puts and one call with a volume of at least 1.25x the open interest. I’m excluding any options that expire tomorrow. None had exceptionally high volume. They varied between 877 and 1,682. Tesla (TSLA) gets that in a second. I’m only half-kidding.
Starting with the Jan. 19/2024 $20 call. I like this one a lot. The ask was $1.10, 6.6% of its $16.64 closing price. This gives the right to buy its stock in 149 days for $21.10, 27% higher than its Wednesday closing price.
While that seems like a lot, it’s got Q3 2023 to report before the expiry. Any good news would likely boost its shares by 10% or more. At the same time, the delta of 0.32549 means a $3.38 increase in its share price would double your money on the call itself. Half of that gets you your money back.
Of the five puts, I’d be inclined to sell the June 21/2024 $15 put with a $2.10 bid. That gives you an annualized return of 15.2%. If it doesn’t fall below $15, you pocket the $210. If its share price flirts with $15, and it’s put to you, your price paid is $12.90. It hasn’t traded that low since August 2010.
If you’re an aggressive investor, betting on a bottom using options is a smart way to play Foot Locker. Remember, if you sell the put, you must purchase the shares at $15 in January when they expire if the put buyer asks you to. Your losses, in this instance, are unlimited.
More Options News from Barchart
- For Peloton (PTON) Speculators, It’s Time to Face Reality
- 2 Bull Call Spread Trade Ideas For AMZN This Thursday
- AMC Entertainment Unusual Options Activity Shows Speculators Are Back
- Institutional Traders Go Contrarian on Kimco Realty (KIM). Should You?
