Wedbush Defends Foot Locker's Q2, Susquehanna Downgrades Stock

Foot Locker, Inc. FL reported Friday second-quarter results highlighted by a notable comp miss but the bullish case for the stock can still be made, according to Wedbush.

Making The Case

Foot Locker's EPS and margins were mostly in-line with expectations in the second quarter but a 0.8% comp growth disappointed against expectations of 3.3%, Wedbush analyst Christopher Svezia wrote in a note. The comp miss can be seen as "another hit" to investor confidence after management's recent pattern of "guidance walk-backs" this year.

Svezia said comps were negatively impacted in the quarter by the product launch calendar, softer apparel sales, and poor results in legacy footwear and at Eastbay. Encouragingly, comps showed signs of acceleration throughout the quarter and July likely came in at a mid-to-high-single digit on a two-year stacked basis.

Looking forward management's guidance for mid-single-digit comps and high-single-digit EPS growth for 2019 looks "achievable" for four reasons. These include:

• The athletic apparel and footwear market continues to grow and supported by Nike's NKE solid product lineup.
• Third-quarter comps could be boosted by back-to-school sales.
• New launches are mostly spread out throughout the back half of the year.
• Key initiatives include the Greenhouse launch in the third quarter and FLX in the fourth quarter.

"In short, though understandably investor confidence has fallen, FL does remain a best-in-class multi-brand platform for in demand products to reach Sneakerheads that continues to evolve to remain so as the 2019 outlook is achievable," the analyst wrote.

Svezia maintains an Outperform rating on Foot Locker with a price target lowered from $64 to $50.

Susquehanna Downgrades

Susquehanna analysts downgraded Foot Locker from Positive to Neutral. The research firm cited an overly optimistic outlook from management despite a strong business model and support of major athletic brands.

The company could still benefit from investments in data analytics, new store sizes, digital and omni-channel capabilities and a loyalty program. However, it will take time for these investments to show results and "that time appears to be moving out."

Shares of Foot Locker were trading higher by 4.5% at $35.55 Monday afternoon.