If there is one thing a dividend investor hates to see, it’s a dividend cut. But that’s just what Foot Locker (FL 1.27%) has done as it attempts to turn its business around. Investors should most definitely read into the board of directors’ decision on this one. The timing suggests that the company’s turnaround isn’t going nearly as well as hoped.
What is a dividend?
From a big-picture perspective, shareholders buy a small piece of a company when they purchase a stock. The company’s earnings per share is the portion of earnings that are attributable to each share of stock an investor owns. Although the company can do whatever it likes with that money, a dividend is, basically, a tangible return of cash from the company’s long-term earnings stream. Basically, you are being rewarded for being an owner.
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Putting its dividend on pause
But paying a dividend is a discretionary decision by management, and so when a company cuts — or in Foot Locker’s case pauses — its dividend, it can raise investors’ eyebrows. It is a statement that things may be worse than you think.
When Foot Locker announced the pause along with its second quarter 2023 earnings late last month, management explained that it was to free up cash for other purposes. And very often, the flexibility companies are talking about when they cut a dividend is balance sheet-related — namely, to pay down debt. But Foot Locker’s debt-to-equity ratio is a fairly modest 0.14. That is up materially from the recent past, but hardly a troubling figure.
FL Debt to Equity Ratio data by YCharts
Where the real problem comes in for the sneaker retailer is a steep drop-off in its business. In the second quarter of 2023, for example, sales fell just shy of 10% year over year. Same-store sales were lower by 9.4%. Those are dismal numbers, with management highlighting the need to discount more broadly than anticipated to protect market share. Essentially, customers are pulling back, particularly those with lower income, and it is having a directly negative impact on the company’s business.
To be fair, Foot Locker entered 2023 figuring it would be tough. At the start of the year, it projected a sales decline of 3.5% to 5.5%. That was subsequently lowered to a range of 6.5% to 8%. And now, after a tough Q2, the company has lowered sales guidance again to down to between 8% and 9%. Things are getting worse, not better.
This comes against a backdrop in which management is attempting to revamp the business to get it back on a growth path — a rejiggering that includes closing some stores, relocating other stores to different areas, changing store designs, and working to better differentiate its various brands so that some are focused more on apparel and others on sneakers, among other things.
There are a lot of moving parts here. While management is confident that this is what needs to be done, it is clearly attempting to make such moves in an increasingly troubling business environment. That’s the big story behind the dividend pause, and it is not particularly flattering. It is a statement that the plan isn’t going as well as hoped and suggests that the next few quarters could be pretty bleak.
Why stick around with no dividend?
By using the word “pause,” the company is clearly attempting to suggest that the dividend will be “unpaused” at some point. However, investors watching Foot Locker’s troubled turnaround should probably ask themselves if it is worth sticking around if they aren’t being rewarded for doing so. There are other companies with generous dividends and doing just fine that you could own instead.
Given the steep stock price decline following the dividend pause, it seems many investors have made the decision to monitor this situation from the sidelines. And given the increasingly negative guidance out of management, that seems like it might be a good plan.