Foot Locker Scores Another Upgrade As New Basketball Releases Resonate

Foot Locker, Inc. FL has notched yet another upgrade in what has been a dramatic sentiment shift from analysts over the past two months.

The Analyst 

Oppenheimer analyst Anna Andreeva upgrades Foot Locker to an Outperform rating with a $70 price target.

The Thesis

With Nike Inc NKE ramping up their innovation with the Epic React release Feb. 22 and adidas AG (ADR) ADDYY's ongoing momentum, Foot Locker is poised to stabilize as 2018 unfolds, Andreeva said in a Tuesday note. The two athletic giants account for nearly 85 percent of Foot Locker's sales.

According to Oppenheimer channel checks, Foot Locker is making solid progress clearing its inventory overhang. Despite elevated markdowns of up to 50 percent on footwear, average selling prices are up in 2017. In 2018, lapping higher markdowns represents a big opportunity, the analyst said. 

New basketball shoe releases are resonating strongly with consumers, bucking fears that arguably Foot Locker's most important segment was in trouble, with the LeBron 15, Kyrie 4 and Harden LS seeing strong momentum. The analyst did not list Under Armour Inc UAA's Curry 4 in the lineup.

With EBIT margins at their lowest in recent history, SCG&A realignment just starting and benefits from tax reform likely to drive additional share buybacks, the analyst said she sees $7 in earnings power possible in the upcoming year, but views $5 as more realistic.

Foot Locker’s valuation is just too cheap at current levels, Andreeva said.

Foot Locker's latest investment in luxury retailer Carbon38 also addresses one of the most longstanding issues within the industry — neglecting the female consumer. 

Foot Locker is "stepping up" to address the undersourced womens segment, expert Matt Powell told Benzinga in a recent interview. 

"I think both brands will benefit from the knowledge they are going to share, he said. 

Price Action

Despite the upgrade, Foot Locker shares were down 0.70 percent at $49.55 at the time of publication. 

Related Links: 

What Foot Locker's Investment In Female Luxury Retailer Carbon38 Means

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