Foot Locker Rallies After Q3 Beat, But Footwear Brands' Direct-To-Consumer Push Concerns Analysts

Foot Locker, Inc. FL shares are soaring after the retailer reported a third-quarter earnings and sales beat Tuesday.

The footwear retailer reported Q3 earnings of 95 cents per share, beating estimates by 3 cents. Sales came in at $1.86 billion, beating estimates by $10 million.

Many analysts remain concerned about major footwear brands' increased focus on direct-to-consumer business and the effect that could have on retailer Foot Locker moving forward. The top five brands at Foot Locker represent 88 percent of the company's sales.

Morgan Stanley: Direct-To-Consumer Push Threatens Foot Locker 

Morgan Stanley analyst Lauren Cassel said the company delivered a solid quarter, but margins are still falling.

Cassel said she remains concerned about the threat of Nike Inc NKE's direct-to-consumer push  and believes Nike will reduce the amount of unique product sold into Foot Locker over time.

“We believe FL’s top 10 percent of customers represent a high percentage of its sales and our AlphaWise survey shows 34 percent of 15-to-24-year-olds prefer to shop through brands’ stores or online,” the analyst said. 

“If these core customers increasingly shop directly with Nike, FL could experience outsized sales declines, pressuring margins." 

Morgan Stanley maintained an Underweight rating on Foot Locker with a $44 price target.

Canaccord Sees Continued Recovery

Canaccord Genuity analyst Camilo Lyon has a more bullish stance and reiterated a Buy rating and raised the price target from $63 to $64.

Foot Locker, in its collaboration with Nike, will work to bring unique product to its storefronts, the analyst said. 

“In addition to the improving product mix, FL is collaborating extensively with its key vendor partners like Nike to offer a unique and differentiated experience to its customers." 

Foot Locker’s strong Q3 results play into Canaccord's recovery thesis and position the company for continued comp/EPS acceleration into 2019, Lyon said. 

Jefferies: DTC Concerns 'Overblown' 

Jefferies analyst Randall Konik is upbeat about the retailers' future and said Nike’s resurgence is starting to benefit Foot Locker, smaller brands are making a contribution and basketball footwear is stabilizing.

“FL remains our favorite way to play Nike’s resurgence in North America, while we view concerns over Nike’s shift to direct as overblown. Better promo control, both industrywide and on FL’s part, should help support margin expansion,” the analyst said. 

Jefferies maintained a Buy rating on Foot Locker and raised the price target from $60 to $62.

Piper Jaffray Stays Neutral, Raises Estimates

Piper Jaffray analyst Erinn Murphy said her long-term view on Foot Locker is unchanged and that footwear brands' direct-to-consumer push will make it difficult for the company moving forward. The analyst commended Foot Locker’s execution and lifted estimates to better reflect current consumer strength and improved growth balance between Nike and adidas AG (ADR) ADDYY.

“Given the digital channel is increasingly where the consumer is shopping, we believe this trend will significantly challenge the ability for athletic retailers (especially those heavily exposed to Nike and adidas) to drive positive comps regardless of how well they execute for in-store customers," Murphy said. 

Piper Jaffray maintained a Neutral rating on Foot Locker and raised the price target from $42 to $51.

Cowen: Limited Multiple Expansion Potential

Cowen analyst John Kernan said sneaker culture is accelerated, but joined the chorus of analysts who believe that direct-to-consumer efforts will prevent meaningful multiple expansion at Foot Locker.  

Kernan maintained a Market Perform rating with a $56 price target.

The Price Action

Foot Locker shares were up 14.91 percent at $52.96 at the close Wednesday. 

Related Links:

How Nike And Foot Locker Trade Together

What The Kaepernick Campaign Means For Nike

Public domain photo via Wikimedia.