Foot Locker shares plunged more than 30% Wednesday, as a sizeable miss on its full-year earnings guidance among other disappointments outweighed better-than-expected quarterly sales and profits. The disappointing report justified our cautiousness on the sneaker retailer amid its recent stock runup. But the magnitude of Wednesday's decline may be overdone. Total revenue in the fourth quarter ended Feb. 3 increased 2% year over year, to $2.38 billion, outpacing the consensus analyst estimate for $2.28 billion, according to LSEG, formerly known as Refinitiv. Adjusted earnings-per-share dropped 61% on annual basis to 38 cents, topping the 32-cent estimate, LSEG data showed. Additionally, same-store sales topped projections, falling 0.7% in the quarter compared with an expected 7% drop, according to estimates compiled by FactSet. Bottom line Foot Locker's headline earnings and sales beat obscured a more mixed picture under the hood — particularly earnings guidance and a two-year delay to the company's long-term operating margin goal. Those bruises in the report are ultimately why the stock is tumbling Wednesday. With shares having advanced 24% since the last report entering Wednesday's session — and about 10% from the start of the year — there is simply no tolerance for a profit guidance miss and margin target pushout. The rally set a high bar, and Foot Locker failed to clear it. Heavy promotional activity — something we noted would be a key watch item for investors —weighed on gross margin performance in the quarter ended Feb. 3. A four percentage point headwind in Foot Locker's merchandise margin due to elevated markdowns was only partially offset by a half-percentage point tailwind from an extra week in the quarter. However, on the earnings call, management indicated the better-than-expected sales were "proactively reinvested into selected markdowns" that allowed the company to end the year in a "solid inventory position," setting it up for a gross margin recovery in 2024. Another challenge in the quarter: Higher-than-expected charges for selling, general & administrative resulting from inflation, higher wages, and technology investments, which led to operating income below Wall Street's expectations. Free cash flow performance also was lackluster in the quarter. Cost savings were among the bright spots in the report Wednesday. CEO Mary Dillon, whose corporate turnaround prowess attracted us to Foot Locker a year ago, noted the company successfully took out $135 million from the company's cost basis in 2023, with another $80 million in savings targeted in 2024. Changes to the retailer's real estate footprint were one factor in the 2023 reductions. The company's long-term goal, as part of Foot Locker's "Lace Up" turnaround plan, is to achieve $350 million in operating cost savings. Digital engagement also appears to be tracking well. Foot Locker's digital business picked up momentum throughout the year and exited the fourth quarter with an 8.9% increase in comparable sales (excluding the prior year's Eastbay results; Foot Locker shutdown the Eastbay website last year and merged it into the Champs brand). Digital sales now represent nearly 20% of Foot Locker's total sales, Dillon said on the call. Helping to drive the strength in digital, "online customer acquisition again grew strong double digits in North America in the fourth quarter," Dillon said. The company is on track to reach its goal of digital sales being 25% of the business by 2026, management said. Still, the bright spots were not enough to block out the sting from Foot Locker's guidance. Despite the fact Foot Locker's forecast for overall sales and comparable same-store sales were better than anticipated, its full-year 2024 earnings forecast came in well below expectations. Another significant drag on the stock: Foot Locker said it now expects to achieve its 8.5% to 9% operating profit margin target by 2028, two years later than originally anticipated. The disappointing outlook requires us to maintain our 4 rating on the stock. Uncertainty in management's ability to turn the business around — and the stock volatility associated with that — is why we've kept this as a tiny position within the portfolio. At the same time, the pullback in Foot Locker shares could be setting up a buying opportunity down the road, given the company has taken its medicine to rebalance inventory levels and put the company in a position to recover some of the lost gross margin going forward. To be sure, there is still a lot of work to do. But depending on where the post-earnings dust settles, we may look to step in and do some buying. That decision would be based on the view that improvements are ahead as Dillon's Lace Up strategy takes hold: Costs are coming down, and strategic moves to increase loyalty and engagement, such as a yearlong basketball-focused program with Nike called "The Clinic," are underway. Guidance The biggest issue with Foot Locker's initial 2024 guidance is its full-year profit projection. Full-year adjusted earnings are expected to be between $1.50 and $1.70 per share, well below the $1.93 consensus estimate, according to LSEG. That remains true even when accounting for a non-recurring, 10-cent-per-share charge expected in the second quarter tied to the broader rollout of Foot Locker's loyalty program in North America. Additionally, as noted above, longer-term, management thinks it will now take two years longer than anticipated to hit its 8.5% to 9% EBIT margin target, now targeting that level by 2028. Here's the rest of Foot Locker's initial guidance for the year: Revenue is expected to be between the range of down 1% to up 1%, including a roughly 1% headwind from an extra week in its fiscal 2023. At the midpoint, that is better than the 0.5% decline Wall Street analysts modeled for. Same-store sales — a key metric in the retail industry — also came in better than expected, with management guiding to a 1%-to-3% increase, versus the 0.5% consensus estimate, according to FactSet. Gross margin is expected to land between 29.8% to 30%, ahead of the 29% we were looking for, based on FactSet estimates, thanks to an expectation of reduced promotional activity. On the other hand, Foot Locker's SG & A rate is expected to be in the 24.4% to 24.6% range. Unfortunately, that is higher than the 23.3% estimate, per FactSet. This metric measures the percentage of each dollar the company generates that is spent on SG & A expenses. Lower is better. Depreciation and amortization charges also look a bit higher than expected, and, as a result, Foot Locker sees its operating margin coming in between 2.8% to 3.2% for the full year, below the 3.3% expected, according to FactSet estimates. Quarterly commentary Same-store sales were better than feared, down 0.7% compared with the 7.1% decline expected by Wall Street analysts. However, that is offset by the fact that they weakened throughout the quarter — after being up low-single digits in November, they fell to down slightly in December to down mid-single digits in January. By geography, same-store-sales were down 0.7% in North America, down 1.0% in EMEA (Europe, Middle East, and Africa), and down 0.2% and the Asia-Pacific region. By store, in North America, same-store-sales were up 4.8% at Foot Locker and 6.9% at Kids Foot Locker. However, they fell 10.4% at its Champs-branded stores. Foot Locker's $112 million in free cash flow solidly missed estimates of $315 million. (Jim Cramer's Charitable Trust is long FL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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