Foot Locker's Inventory Woes and Uncertain Path: Analyst Calls It Fairly Valued

Piper Sandler analyst Abbie Zvejnieks initiated coverage on Foot Locker Inc. FL with a Neutral rating and a price target of $19. 

The analyst writes that forecasting and inventory management have been challenging for Foot Locker. 

As FL's lower-income consumer has pulled back on discretionary spending, inventory has increased, which could lead to the continued use of promotions to support the business.

47% of FL's customers are considered lower income, and this customer is feeling pressure from inflation and the absence of stimulus, the analyst adds.

FL's inventory has grown 49% vs. the comparable 2019 quarter, while sales have grown 5%, and while 2Q was likely the peak for inventory. 

FL is one of the worst offenders in terms of excess inventory within the U.S. wholesale channel, the analyst adds.

While the analyst is optimistic about increasing penetration of non-Nike, Inc. NKE brands, he cautions on the 'revitalized' Nike partnership as Nike will continue to favor its direct channels and connected partners for the newest, high-heat products, which are currently driving demand. 

There are clear opportunities for profitability improvement as the new management team optimizes and simplifies the business. Still, the current valuation is fair, given the uncertainties ahead. 

For FY23, the analyst's revenue estimate stands at $7.97 billion, with EPS of $1.35. For FY24, revenue estimate stands at $8.09 billion, with EPS of $2.09.

Price Action: FL shares are trading lower by 2.41% to $17.02 on the last check Tuesday.