Foot Locker (NYSE:FL) shares went on the defensive Wednesday in the wake of what many saw as lackluster results coupled with the company’s announcement to close stores in Asia and Europe, and relocate its HQ to Florida. The company swung to a loss and issued underwhelming guidance for FY24 driving shares as much as 16.5% lower during the day.
As the knee-jerk reaction evaporated, shares recovered and are currently more than 4% in the green. On closer examination, Wall Street is taking second – albeit more sanguine — view of Foot Locker (FL), specifically growth in comparative store sales, inflection in merchandising margins, and reduction in promotional pricing in the U.S., all of which will lead to a return to profitability and sales growth.
“Comparable sales are maybe the most important figure for a [brick & mortar] retailer, and Q2 2024 was the first quarter in which Foot Locker posted positive comparables,” said SA investor Quipus Capital.
Comparable sales were up 2.6% in Q2, ahead of the company’s expectations to remain flat to slightly positive and were led by gains in global Foot Locker and Kids Foot Locker banners, with combined comparable sales of +5.2%.
“Our comp trend strengthened as we moved through the quarter,” said CEO Mary Dillon on the company’s earnings call, adding that July was the company’s strongest month with a solid start to the back-to-school season, evidence that the company’s strategic investments in support of its Lace Up Plan are taking hold.
By expanding its store offerings from vendors like adidas (OTCQX:ADDYY), New Balance, On Running (ONON), HOKA (DECK) and UGG (DECK), the company is expanding its sneaker culture by offering more choice and serving more consumers for more occasions, another contributing factor to increased comparable sales, and further grounds for an upgrade from Barclays to Overweight from Equal Weight and a corresponding 26% hike in the price target to $34.
But while corporate actions can have a negative impact on the company long-term, such as moving corporate headquarters, Barclays chooses to focus on known fundamental improvements, like merchandise margin recapture that will have an upside impact to margins in the second half of 2024 with further gains over the next 12 to 18 months in both margins and earnings.
“We believe [Foot Locker’s] positive fundamental quarter is being overshadowed by uncertainty over the mid- to longer-term corporate realignment actions. Given the near-term visibility on a turnaround in the core business, we believe the risk/reward at current levels is attractive,” Barclays analyst Adrienne Yih writes.
Quipus Capital is more cautious, however, seeing it as unlikely Foot Locker will return to higher margins given the challenging outlook and “excessive expenses” in SG&A. “I maintain a Hold rating as the potential for margin improvement is uncertain, and the stock price reflects optimistic recovery assumptions.”
Analysts are neutral on Foot Locker (FL) with Seeking Alpha authors and Wall Street analysts rating the stock as a Hold. Seeking Alpha’s Quant rating views Foot Locker (FL) as a Buy.
