Foot Locker (FL) Dividend Cut

Foot Locker Inc (FL) is a well-known retailer of sneakers and athletic wear. The company was also a dividend growth stock. In fact, the stock was a Dividend Challenger having raised the dividend for nine consecutive years before the coronavirus pandemic. The sneakers and other items that Foot Locker sells are somewhat discretionary and non-essential. You can always trade down for sneakers to one that is lower cost. You also put off purchasing the $100 jersey of your favorite athlete. In any case, during times of economic distress Foot Locker’s sales usually take a hit. The coronavirus pandemic has arguably resulted in unprecedented challenges for Foot Locker with local governments closing many malls and retail locations. The company first temporarily suspended the dividend. Foot Locker recently reinstated the dividend but at a lower level than before the pandemic, which is effectively a dividend cut.

Overview of Foot Locker

Foot Locker is a global retailer of sneakers, athletic apparel, and accessories. Foot Locker opened its first store in 1974. Interestingly, the company is the successor of F.W. Woolworth Company. Woolworth’s flagship stores declined and in 2001 the company changed its name to become Foot Locker in 2001. Today, Foot Locker operates about 3,129 stores in North America, Europe, the Middle East, Africa, and the Asia Pacific. The company operates retail stores and e-commerce under the Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Eastbay, Footaction, Runners Point, and Sidestep brand names. The company sells sneakers from major brands such as Nike (NKE) and also licensed merchandise from teams and athletes. Foot Locker had about $8,005 million in sales in fiscal 2019.

Foot Locker Dividend Suspension

The firm was adversely affected by the COVID-19 pandemic very early. On March 17, 2020, the company pulled its 2020 guidance that it had only issued at end of February. The company also closed stores across all its brands in North America, Europe, Middle East, and Malaysia from March 17^th to March 31^st. The remaining stores were open for the most part. By April 22^nd, Foot Locker was being severely impacted by the pandemic. The company instituted furloughs starting on April 26^th for majority of store employees in the U.S. and Canada and some stores in Australia. The impact of the pandemic was severe enough that Foot Locker reportedly did not pay rent in April for closed stores.

Foot Locker reported a poor first quarter missing both top and bottom line estimates. The company also temporarily suspended the dividend. The company stated:

Additionally, while Foot Locker remains committed to returning capital to shareholders, the Company’s Board of Directors has decided to temporarily suspend the cash dividend beginning with the second quarter payment. The Board will continue to evaluate the dividend policy on a quarterly basis. As previously disclosed on April 22, the Company also temporarily suspended its share repurchase program.

From the Q1 2020 earnings call transcripts:

After thoughtful consideration by our Board, earlier today, we announced the suspension of our quarterly cash dividend. While returning capital to our shareholders continues to be one of our capital allocation priorities, given the current environment we believe this is the prudent and responsible action to take at this time and one that will ultimately enable us to create more shareholder value over the long-term. Our Board will continue to evaluate our dividend policy on a quarterly basis. With malls closed and stay-at-home orders in place across most of our markets, we did not make payments on our April rent. We continue to work with our landlords to come up with a longer term resolution for April in the coming months as the retail marketplace evolves.

The regular quarterly cash dividend was $0.40 per share. This move was not surprising as it would save Foot Locker about $40 million per quarter. When the goal is to preserve liquidity and strengthen the balance sheet every move to reduce cash flow requirements counts.

Foot Locker Dividend Reinstatement and Cut

Foot Locker’s recovery was reportedly slow driven first by on-line sales and slow reopening of malls and retail locations. It is likely that April and May were the bottom for Foot Locker as well as many other retailers. As more stores opened though, Foot Locker’s sales gained momentum in June. By early-August Foot Locker reported that Q2 sales would be +18% on year-over-year basis in the middle the pandemic. Considering the depth of the downturn this was remarkable in my opinion. It is likely that sales were driven by pent up demand from consumers combined with the magnitude of the federal stimulus including unemployment benefits. Foot Locker guided for a profitable second quarter after a loss in the first quarter. Foot Locker eventually beat on revenue and adjusted earnings per share for Q2 2020. Note that Foot Locker’s second quarter ended on August 1, 2020.

The rebound in sales permitted the company to reinstate the dividend. However, the dividend was at a lower level than before the pandemic started meaning the Foot Locker essentially cut the dividend. The regular quarterly cash dividend was reinstated at $0.15 per share. This is 62.5% lower than the last previously announced quarterly dividend of $0.40 per share. At the time, the forward yield was roughly 2.21%. The CFO stated:

Looking ahead, we believe the Company is well positioned financially to maneuver through the evolving COVID-19 pandemic. As a first step, the Board reinstated the dividend at a cautious but meaningful level to begin returning cash to shareholders. As always, the Board will continue to evaluate the dividend program on a quarterly basis.

Final Thoughts on Foot Locker Dividend Cut

Foot Locker has seemingly navigated the COVID-19 pandemic fairly well considering the depths of the downturn in the retail sector in April and May. A few companies on the coronavirus dividend cuts and suspensions list have started to reinstate the dividend. This is typically at a lower level than before the pandemic started. However, it does point to the improvement in the economy and outlook for some of these companies.

It seems that April and May were probably the bottom for many retailers including Foot Locker. The combination of pent up demand, federal stimulus, and lifting of local government restrictions drove sales as second quarter progressed for Foot Locker. However, the effect of the stimulus is fading, and demand may be slower in the third quarter. Hence, I view at as unlikely that Foot Locker’s dividend will be raised to pre-pandemic levels quickly.

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