Foot Locker surged Thursday after its quarterly earnings report showed signs that CEO Mary Dillon’s turnaround plan is starting to pay off. The sneaker retailer isn’t out of the woods just yet, but we’re removing the stock from our penalty box and upgrading its rating. Revenue declined 2.7% year over year to $1.879 billion, slightly below Wall Street expectations of $1.883 billion, according to estimates compiled by LSEG. Adjusted earnings per share of 22 cents easily topped the 12-cent estimate, LSEG data showed. At its highs of the session Thursday, Foot Locker was up nearly 32% before giving up some of those gains. In midday trading, the stock was up about 20%. FL YTD mountain Foot Locker’s year-to-date stock performance. Bottom line Foot Locker is on better footing than people thought in the wake of its calamitous report in early March , when Dillon pushed out the timeline for its turnaround. At the very least, Thursday’s first-quarter release and conference call showed management is making progress toward those reset goals. That counts for something, especially when Foot Locker’s stock entered Thursday down nearly 35% since the session before the March disaster. The bar was low. But Foot Locker cleared it. “Mary Dillon, the CEO, is back on plan, making the turn,” Jim Cramer said Thursday during the Club’s Monthly Meeting. “She is going to make something of this mishmash after all. … This call today was terrific and if the stock weren’t up [nearly $5] I would tell you that it’s buyable right now. We have an ultra small position on and for the first time I can tell you I wish it were bigger.” In addition to the better-than-expected earnings and margins, some of the key highlights included month-to-month strengthening in comparable-store sales — a key metric in the retail industry — even as Foot Locker’s promotional activity moderated. It’s a sign customers are willing to pay up when they like the products available to buy. “You want to see that,” Dillon said in a CNBC interview. “We’ll watch the customer,” Dillon added later, referring to general amid concerns consumer spending. “But we think we have the right things at the right time for them.” Companywide, which includes Champs locations, Foot Locker’s comparable-store sales declined 1.8%, slightly better than the 1.9% drop Wall Street expected. Encouragingly, Dillon told CNBC that Foot Locker and Kids Foot Locker saw positive comp-store sales. “[We] feel really good about that. To me, these are just signs that our ‘Lace Up’ plan is working,” Dillon said, referring to the name of the company’s turnaround strategy. To be sure, Champs locations continue to be drag on the whole company, though management indicated on the call that its efforts to retool the brand are showing early signs of life. We’ll need to see more evidence of that in the coming quarters. A few more positives: Management said comps in the current quarter will be flat to slightly positive compared with the year-ago period. And on CNBC, Dillon also described Foot Locker’s relationship with key partner Nike as “reinvigorated,” which follows a strategy shift from the Oregon-based company to lean back into wholesale partnerships. While Nike has had some struggles of its own due in part to competition from upstart brands like Hoka and On Holding , analysts have said a better relationship with the company can benefit Foot Locker’s sales and margins over time. Foot Locker also is working to improve its customer relationships with the relaunch of its FLX Rewards loyalty program this quarter. It’s an initiative that management believes can lead to customers shopping with the company more often. All these signs of progress are enough to warrant an upgrade on FL shares to a 2 rating, meaning we’d buy on a pullback. Our price target is under review. We recognize that after cutting guidance three times last year, Foot Locker may need to do more to rebuild credibility on the Street. That’s why simply reiterating its outlook alongside an earnings beat is sparking such a strong reaction in the market Thursday. For now, we’ll take this rally and hope that an opportunity to boost the size of our small position arises down the road. Foot Locker Why we own it: We are in Foot Locker for the turnaround. CEO Mary Dillon worked miracles when she ran Ulta Beauty . She has a knack for reviving struggling brands, and we’ve been betting that she can do the same at Foot Locker. We grew frustrated as Dillon’s revamp hit obstacles, but we’re highly encouraged by Thursday’s results and commentary. Competitors: JD Sports, Dick’s Sporting Goods and Nike Last buy: May 9, 2023 Initiation: March 27, 2023 Guidance Foot Locker maintained its full-year outlook for the 12 months ended Feb. 1, 2025, on all 13 metrics for which it provides guidance. That means it continues to see comparable sales rising between 1% and 3% with gross margin between 29.8% and 30%. It also sees adjusted earnings per share in a range of $1.50 to $1.70. Overall sales are expected in a range of minus 1% to 1%, which includes 1% headwind tied to an extra week in its previous fiscal year. For the current quarter, management said on the call that comparable-store sales are projected to be flat to slightly positive on an annual basis. Comp improvement throughout the year will need to continue for Foot Locker to hit its aforementioned full-year outlook. Second-quarter gross margin should be roughly flat compared with the year-ago period, but improving on a quarter-over-quarter basis. (Jim Cramer’s Charitable Trust is long FL and BBY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. 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Foot Locker surged Thursday after its quarterly earnings report showed signs that CEO Mary Dillon’s turnaround plan is starting to pay off. The sneaker retailer isn’t out of the woods just yet, but we’re removing the stock from our penalty box and upgrading its rating.