Shares of shoe retailer Foot Locker(NYSE: FL) are soaring this morning after the company reported financial results for its fiscal third quarter of 2023. I'm not sure the quarter could be called "good" by any means. But it was better than depressed expectations, and it offered a glimmer of hope for the future. And that's why Foot Locker stock was up 17% as of 10:15 a.m. ET.
Not so good but not so bad
Generally speaking, I'd say a good quarter would show revenue growth and profit-margin improvements. But Foot Locker showed exactly the opposite. In Q3 (which ended Oct. 28), the company's revenue fell 8.6% year over year. Moreover, its net income fell to $28 million from $96 million in the prior-year period.
Foot Locker resorted to marking down prices to stimulate sales. As a result, its gross margin fell from 32% last year to 27.4% in Q3.
Still, Foot Locker's Q3 results were better than Wall Street expected. And CEO Mary Dillon inspired investor confidence by saying that Thanksgiving week -- which kicks off the important holiday shopping season -- had strong sales results.
Is Foot Locker stock a buy?
While Dillon says Thanksgiving sales were strong, it's likely only on a relative basis. Guidance for the upcoming fourth quarter still expects a 2% to 4% year-over-year decline in sales. And its Q4 gross margin is expected to be about 27%, which is down from the prior-year period. This implies that the company will continue to rely on markdowns to stimulate consumer demand.
That said, given that it's trading at the really cheap price-to-sales ratio of 0.3 (near its lowest in over a decade), expectations for Foot Locker are extraordinarily low, and the stock could consequently keep rebounding with results similar to those in Q3. Results don't necessarily have to be great, just stable with reasons to hope.
I believe it's fair to wonder whether Foot Locker's relevance will increase over the long term or not. Shoe companies can more easily sell directly to the consumer than ever before. Therefore, while the stock is cheap, investors should consider the long-term viability of the business model before deciding if this is a stock to buy.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Foot Locker. The Motley Fool has a disclosure policy.
