Foot Locker Inc., a renowned retailer, is experiencing a slower start to the back-to-school season due to the economic pressures affecting customers’ spending habits.

Sales Challenges

During a recent conference call to discuss the company’s results, Foot Locker’s Chief Executive, Mary Dillon, expressed her concerns about softer-than-expected sales in the first half of the year. She highlighted the persisting challenges in store traffic and conversion rates since late Q1. Dillon attributed these difficulties to customers being cautious with their discretionary spending.

Promotional Efforts

To stay competitive and manage inventory levels, Foot Locker implemented more extensive promotional activities than initially planned. This strategic move aimed to secure a larger share of customers’ spending while also maintaining optimal stock levels.

Weaker Back-to-School Season

Dillon acknowledged that the back-to-school season has had a weaker start for Foot Locker in July and August. She emphasized that this period encompasses various product categories, including sneakers, school supplies, and sports equipment. Despite having the desired products for back to school, Foot Locker faces additional challenges due to customers’ greater pressure on discretionary spending.

Stock Performance

As a consequence of these challenges, Foot Locker’s stock plummeted by 31.6% on Wednesday. The company reported a second-quarter loss, revised its full-year guidance downward, and suspended dividend payments.

Foot Locker Reports Moderate Increase in Inventory Levels

During the second quarter, Foot Locker experienced an 11% year-over-year increase in inventory levels. However, the company states that this growth is now stabilizing. CFO Mike Baughn expressed satisfaction with the progress made in the quarter, noting that they expect the year to end with flat to slightly decreased inventory levels.

Impact of Inventory Shrink on Retail Earnings

Baughn highlighted that Foot Locker faced elevated levels of inventory shrink in the quarter. This issue is a recurring concern in the retail industry. While factors like damaged items contribute to inventory shrink, theft and organized retail crime have become increasingly significant drivers. Retail giants like Target Corp and Home Depot Inc have acknowledged these challenges.

Promotions and Occupancy Costs

When discussing the drivers behind inventory shrink, Baughn pointed out that promotions played a major role, followed by the deleverage of occupancy costs. He emphasized that their back-half guidance considers an expectation of similar shrink levels as experienced throughout the year.

Performance and Comparisons

In 2023, Foot Locker’s stock has declined by 57.9%, contrasting sharply with the S&P 500 index’s gain of 15.3%.

Ciara Linnane contributed to this report.

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