Foot Locker (NYSE: FL) has been muscling through the pain of inflation, supply chain hiccups, and an uncertain economic environment to come out ahead. The company has been working to reposition itself for the times, and those efforts are clearly paying off. The Q4 results are tepid; headwinds are present, but the results are better than the analysts were expecting and coupled with plans to “reset” the business for 2024. 

This means the upcoming investor day event will highlight a new set of long-term plans and targets. The plan is called “Lace Up” and includes low to mid-20% EPS growth targets in 2024 and beyond. One of the avenues the company is pursuing is its Asia business which will be restructured to give less direct exposure to the riskiest markets. The takeaway for investors is that premarket action after the release has shares moving higher for this fairly-valued, high-yielding dividend stock. 

Foot Locker Outpaces Expectations In Q4 

Foot Locker had a decent Q4 but not a stellar quarter. The company’s $2.33 billion in revenue is down -0.4% compared to last year because of a 3.6% FX-related headwind. The revenue beat the Marketbeat.com consensus, which is part of why their stock is increasing. Organically, business is better than it looks at the headline level. Comps at opened stores were 4.2% higher than last year and offset by 80 store closures. The company says traffic was good and mixed with an attractive selection of inventory. Moves from manufacturers like Nike (NYSE: NKE), Wolverine Worldwide (NYSE: WWW), and Skechers (NYSE: SKX) helped to set that up and may also give solid reports this quarter. 

Margins compressed due to higher promotional activity but less than expected. The gross margin contracted by 290 basis points and was offset by a 10 basis point improvement in SG&A expense. Adjusted net income fell by 37%, almost the worst news in the report, but the Q4 GAAP and adjusted income beat consensus. The adjusted $0.97 beat by $0.47 and helped the company improve its financial position. Net debt was reduced by 75% compared to last year, including a 30% increase in inventory and $129 million in quarterly share repurchases. 

Guidance is mixed but offset by the company’s plan to rest the business. The revenue is expected to be down 3.5% to 5.5%, including an extra week in the fiscal year which offsets by about 100 basis points. The adjusted EPS is the bad news; it is expected to be $3.35 to $3.65 compared to the Marketbeat.com consensus of $4.08.

Foot Locker’s Dividend Appears Reliable 

The market has been surprised by a couple of dividend cuts this reporting cycle, but Foot Locker doesn’t look to be in that position. The company is yielding about 3.8% due to the low valuation; the shares traded at only 9X earnings outlook, albeit that valuation is moot now. The payout ratio is 47% of the low-end of earnings guidance, so not a burden for the business, and the balance sheet is improving. Cash is down YOY but still healthy, while inventory is up and debt is down. The company may refrain from increasing the payout, but it should have no trouble maintaining this one. 

Shares of Foot Locker are up about 10% on the earnings and outlook and may continue higher. The move has the market set up to continue a trend that began in the middle of 2022, but there is a hurdle to cross. The market needs to get above resistance at the $47.25 level, or it may become range bound.