Canaccord Genuity: Foot Locker's Fortunes Are Turning Toward The Upside

Foot Locker Inc FL's woes appear to be overplayed, according to Canaccord Genuity. 

Despite suffering a 35-percent year-to-date decline amid a struggling sports retail environment, a sell-side analyst is confident after a meeting with the retailer's management that it's positioned for a solid 2018.

The Analyst

Camilo Lyon of Canaccord Genuity upgraded Foot Locker from a Hold to a Buy and raised the price target from $42 to $64.

The Thesis

One of the biggest fears surrounding Foot Locker has been Nike Inc NKE’s increased focus on direct-to-consumer sales. 

Nike announced at its investor day in October that it would be moving from 30,000 retailers to just 40, with a focus on differentiated retail. After meeting with Foot Locker CFO Lauren Peters, Lyon said he felt Foot Locker made it “abundantly clear that the company’s relationship (with Nike) is strong and symbiotic.”

More importantly to Lyon, Foot Locker’s assortment-led comp declines are cyclical and not structural in nature, which has been a big fear among sporting good retailers, he said. 

Although footwear sales continue to be soft, trends are starting to grow sequentially, and Nike’s new innovation pipeline expected to hit the market in six to 12 months — an encouraging sign for the market, according to Canaccord.

Foot Locker has shown improvements in its efforts to improve e-commerce and speed to market through its own initiatives, Lyon said. 

At the crux of Lyon’s upgrade is his projection that Foot Locker is approaching the end of the clearance cycle it has been in over the last three quarters. The company will "right-size" its inventory by early 2018, helping the footwear retailer reverse the gross margin compression it has seen over the past year, he said. 

“In sum, we see FL’s gross margin recovery, the impact from buybacks and the potential benefit from tax reform as severely underappreciated.”

Price Action

Foot Locker shares were up 3.88 percent at $46.05 at last check. 

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