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Foot Locker (FL +4%) jumps from yesterday's one-year lows following double-digit earnings upside in Q4 (Jan) and encouraging improvements related to the footwear retailer's Lace Up turnaround plan. There are still pressing issues ahead for FL, keeping a lid on further appreciation today. The company cautioned that consumers grew more cautious and sensitive as it moved into February, hurting its QTD numbers. As a result, FL projected weak FY26 figures, predicting adjusted EPS and revs below consensus. On a lighter note, FL did target +1.0-2.5% same-store sales growth this year, consistent with estimates. Silver linings like this were seen throughout the company's Q4 report, slightly outshining the many concerning consumer trends.

• FL maintained positive comps in Q4, registering a +2.6% increase, bolstered by a +3.6% jump across the company's global Foot Locker and Kids Foot Locker banners. Management mentioned that a strong build during peak holiday sales underpinned the gains. Encouragingly, at Champs Sports, Q4 marked the second straight quarter of positive comp growth since the banner's repositioning started. Total revenue fell 5.7% yr/yr to $2.25 bln, just under analyst expectations due to lapping the 53rd week in 2023, FX headwinds, and store closures.
• Gross margins were another silver lining, expanding by 300 bps yr/yr in Q4, led by merchandise margin recovery as FL lapped higher promotion levels. Meanwhile, FL's cost-savings plan continued to flow to its bottom line, generating $35 mln of savings in Q4. As a result, adjusted EPS surpassed FL's outlook of $0.70-0.80, reaching $0.86 in the quarter.
• FL's Lace Up plan continues to show promising progress. During FY25, FL returned to positive enterprise comp growth, gross margin expansion, and positive free cash flow, all of which it anticipates will continue in FY26. Components of the plan include opening reimagined stores, where the emphasis is more on basketball, refreshing existing stores, re-tooling its loyalty program, and extracting further savings.
  • FL touched on the many successes of these pillars. For example, the response to its reimagined doors has been "extremely positive." Furthermore, its rewards program was accompanied by increased purchase frequency and a step-up in FL's sales capture rate in Q4.
  • The company plans to accelerate its reimagined store openings, complete around 300 additional refreshes, continue improving its rewards program, and achieve $60-70 additional savings in 2025.
• However, due to the dynamic economic backdrop, FL is proceeding carefully. Consumers still respond positively to compelling activations, key shopping events, and product launches. However, between these events, they are spending more cautiously. As a result, FL plans to slow its investment cadence across some of its technology initiatives, balancing the near and long-term business needs and ensuring it prioritizes its Lace Up strategies.

FL's Q4 report was a step in the right direction. Its Lace Up plan is showcasing noticeably uplifting progress. Nevertheless, the economic environment could cap near-term growth, making it challenging for the stock to bounce back aggressively.