Citi Highlights Top Back-To-School Stocks

Some Top Names

"Although we have seen a significant move in FL since late June, and a strong quarter on 8/19, we think there is still room for upside in the stock as the company benefits from an ongoing strong sneaker culture, as well as being a still relevant brick & mortar destination (traffic is consistently positive)," McShane wrote in a note.

McShane sees upside to Foot Locker's mid-single-digit annual comp growth guidance and operating margin expansion in 2016 and beyond. The upside is expected to come from a robust pipeline from Nike Inc NKE and other vendors, ongoing banner remodels, European rollout and apparel improvement.

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The next catalyst will be in November when Foot Locker reports its third quarter results, which the analyst expects could be better than guided. The potential upside is attributed to the easier compares in basketball, improvement in Nike's signature category, the ongoing momentum in athletic casual footwear and ongoing growth in ASPs.

On Dick's, the analyst acknowledged that the company's strategic investments in 2016 will weigh on EPS. But, McShane noted that those investments have the potential to drive long-term share gains given TSA closures. The analyst expects improving comps in the fourth quarter and EPS growth acceleration in 2017.

For Finish Line, McShane said 3–5 percent comp growth in 2016 seems achievable and margins should improve in the second half of 2016.

"We believe FINL's new CEO, improving brand relations, store remodel/optimization plans, and solid industry growth provide a good backdrop," the analyst elaborated.

All three stocks are Buy-rated, with price targets of $79 for Foot Locker, $68 for Dick's and $24 for Finish Line.

The Sector

On the sector front, a survey from the National Retail Federation (NRF) projects back to school spending to increase 11.5 percent. However, the analyst said fewer tax holidays this year could be a modest headwind for retailers.

In general, retail sector is plagued by persistently negative traffic trends, continued promotional pressure, higher inventories and a lack of significant innovation. However, the analyst believes athletic continues to be a key trend and a secularly "in-tact" industry.

Further, this year, the analyst said several athletic and footwear stocks are trading at a discount, including Under Armour Inc UA, Nike and Skechers USA Inc SKX.

In addition, the analyst noted that FY16 sales expectations are expected to average about 5.2 percent across all apparel/footwear companies and about 10.9 percent for athletic retail players.

"While athletic has been strong for close to 8 years, we think these companies can still capitalize on increased casualization and ongoing innovation," McShane added.

Full ratings data available on Benzinga Pro.