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Foot Locker’s Shares Rise On Upgrades Following Investor Day

Foot Locker’s Shares Rise On Upgrades Following Investor Day

Shares of Foot Locker rose 7 percent on Tuesday as analysts at Citi and Evercore upgraded the stock following the retailer’s Investor Day on Monday. Citi’s Paul Lejuez said Foot Locker’s moving in the right direction, turning attention away from malls and the Champs brand and instead focusing on offerings related to kids, loyalty and digital.

Shares of Foot Locker closed up $2.78 to $42.65 Tuesday on the New York Stock Exchange.

At the session, Mary Dillon, Foot Locker’s CEO and president, delivered a long-term growth plan that called for comp store growth in the range of 3 percent to 4 percent and EPS growth in the low- to mid-twenties from fiscal years 2024 through 2026.

Foot Locker also reported fourth-quarter earnings and sales that topped expectations although they were below year-ago levels amid the promotional climate. However, Foot Locker also provided a weak outlook for the current year, expecting earnings in the range of $3.35 to $3.65, down from $4.95 in 2022 and compared to Wall Street’s consensus target of $4.15. Comparable sales are expected to be down in the range of 3.5 percent to 5.5 percent. Shares fell $2.43 Monday on the soft guidance.

In a note, Citi’s Paul Lejuez said Foot Locker is moving in the right direction, turning attention away from malls and the Champs brand and instead focusing on offerings related to kids, loyalty and digital.

“Following a big 4Q beat, management significantly lowered the bar for F23, guiding comps down 3.5 percent to 5.5 percent, laying the groundwork for beats/raises all year,” said Lejuez. “FL’s flagship banner is very healthy (FL 4Q comp +13 percent) and FL’s relationship with Nike seems in much better shape than previously expected (sales of Nike were flat in 4Q22). New CEO Mary Dillon is doing the right things by shifting stores off-mall while closing many mall stores and shutting weaker businesses, and focusing on loyalty/digital. And, while the long-term plan to grow sales +MSD in F24 to F26 sounds ambitious, our current model only assumes +2.5 percent growth annually, suggesting that upside beyond our current TP is possible if management executes the plan.”

Citi upgraded the stock from “Neutral” to “Buy” and raised its target price to $50 from $47.

At Evercore, analyst Warren Cheng thinks Dillon and her management team articulated a “thoughtful, credible vision” that leans into the things that Nike, Adidas and Under Armour cannot do themselves as “monobrands.”

The stock upgrade in part reflects Foot Locker’s new plan to aggressively reposition the overall business to “areas where Foot Locker truly has moats with both customers and its brand vendors while exiting the less-moated parts of the business.”

Cheng also said proprietary analysis indicates that despite DTC disintermediation in some areas, Foot Locker “remains highly relevant for street/lifestyle drops, not just with Nike but with all brands, which is where FL’s new strategy is rightfully leaning in.” Finally, Cheng believes the inventory/promotional risk associated with Foot Locker “has been misunderstood” by investors in the near term.

Cheng overall believes the EPS and sales growth outlook from FY24 to FY26 is “very realistic following a significant reset in 2023 to a much healthier base.” The reset includes exiting some Champs locations, licensing out Asia operations and improving relations with Nike. Cheng wrote, “Equally importantly, we think Foot Locker will start to flip the script away from a disintermediation narrative to a grow-with-secularly healthy-sneaker-demand narrative.”

Evercore upgraded Foot Locker to “Outperform” From “In Line” and hiked its price target to $60 From $32.

Among other investment firms, Wedbush maintained its “Neutral” rating with a $40 price target. Analyst Tom Nikic wrote, “We think management laid out an interesting roadmap at the event, we’re encouraged by the “revitalization” of the Nike relationship, and we think CEO Mary Dillon is one of the most credible and capable executives in the industry. That said, there are near-term challenges to contend with, as evidenced by the disappointing FY23 outlook, so we’re going to continue waiting until we have evidence of Ms. Dillon’s strategies taking hold.”

Barclays kept its “Neutral” rating while raisings its price objective to $43 from $40. Adrienne Yih wrote in a note, “With FY23 a rebasing year, ongoing pressure from promotions, negative fixed-cost leverage, sell-through of still higher-cost inflation product, store and concept closures, and strategic investments, we look for greater visibility on the macro backdrop to give us more confidence in the FY24 and beyond growth targets. We have previously witnessed Mary Dillon execute a successful turnaround and growth plan at ULTA (OW) during her tenure. We believe her marketing expertise, product and customer focus, and operational and leadership prowess can lead FL into its next 50 years as a leader in the athletic footwear space.”