Morning Note: Market news and an update from Foot Locker.
Market News
US equity markets were little changed last night – S&P 500 (-0.1%); Nasdaq (-0.2%) – as Loretta Mester signalled support for standing pat on rates at next month’s FOMC meeting. The Fed’s Beige Book showed economic activity slowed in recent weeks as consumers pulled back on discretionary spending. Today’s US data may add to the soft-landing narrative, with core PCE inflation seen slowing in October to 3.5%. The 10-year Treasury yield fell below 4.3%, while gold is little changed at $2,043 an ounce.
This morning in Asia, markets were firm – Nikkei 225 (+0.5%); Hang Seng (+0.2%); Shanghai Composite (+0.3%) – and headed for their best month since January as weak Chinese manufacturing data boosted hopes for more policy support. The figures showed activity shrank for a second straight month in November and at a quicker pace: Manufacturing PMI fell to 49.4, further below the 50-threshold between expansion and contraction, and the non-manufacturing index also surprised with a drop to 50.2 from 50.6.
The FTSE 100 is currently little changed at 7,428. Companies trading ex-dividend today include 3i Group (1.19%), Johnson Matthey (1.37%), and Severn Trent (1.72%). Sterling trades at $1.2689 and €1.1577.
Oil moved up to $83.30 a barrel as OPEC+ talks remain deadlocked. However, investors expect a resolution with holdouts Angola and Nigeria before the main policy-setting session for 2024. Copper held near the highest in more than 10 weeks with the shutdown of a large mine in Panama threatens to wipe out the global surplus.
Source: Bloomberg
Company News
Yesterday lunchtime, US-listed sportswear retailer Foot Locker released results for the third quarter of its financial year to 31 January 2024 which were better than management expectations. This represents a reversal of the weak update posted back in the summer which forced the shares down by 35%. In response, the shares of Foot Looker (+16%) and others in the sector bounced.
Foot Locker is a leading footwear and apparel retailer with around 2,600 retail stores in 26 countries. In addition, 190 franchised stores are operating in the Middle East and Asia. During the latest quarter, the company continued to improve its estate, with 22 new stores opened, 36 remodelled or relocated, and 14 closed. The group recently entered a partnership with the NBA as an official league marketing partner in the US and is planning to strategically enter the Indian market through license partners.
In the three months to 28 October, total sales fell by 8.6% to $1,986m. Comparable-store sales fell by 8.0%, driven by ongoing consumer softness, changing vendor mix, and a 3% negative impact from the repositioning of its Champs Sports brand. North America endured the bulk of the decline, with comparable-store sales down 9.5%. The core Foot Locker brand was only down 4.9% in North America, 3.9% in Europe, and 1.2% in the APAC region.
Foot Locker’s gross margin fell by 470 basis points, driven by higher promotional activity (which included higher markdowns) and inventory shrink (retail theft). EPS fell from $1.27 to 30c but was better than the market expectation of 21c.
The group’s balance sheet remains robust, with net debt standing at $262m at the end of the period. On a positive note, inventory remains up but is moderating – as at 28 October merchandise inventories were $1.9bn, 10.5% higher than the year before, including a 6% impact from the strategic pull-forward of inventory into the quarter to best position the company for the upcoming holiday season.
During the quarter, the company paid a quarterly dividend of $0.40 per share. As previously announced, future dividend payments have now been paused to increase balance sheet flexibility in support of longer-term strategic initiatives. In addition, the company did not repurchase any shares during the quarter.
The group benefitted from strong results over the Thanksgiving week period against the backdrop of ongoing consumer uncertainty. In response, it has narrowed its full-year guidance range and still expects to end the year with inventory levels flat to down slightly, as compared with the prior year. Full-year comparable sales are now expected to fall by 8.5%-9.0% versus its previous forecast for a 9.0%-10.0% decline. EPS guidance is now $1.30-$1.40 versus $1.30-$1.50 previously.
While the industry has suffered from a near-term malaise, we remain positive on the long-term outlook, with growth driven by increased consumer demand for healthier living – the recognition of which increased during the pandemic – the shift to personalised products, and growth of digital sales.
Source: Bloomberg