Foot Locker Gains From Growing Strategic Brands: Analyst Sees Strength In Community And Power Stores

Telsey Advisory Group analyst Cristina Fernández reiterated an Outperform rating on Foot Locker, Inc. FL, raising the price target to $31 from $22.

The analyst writes that Foot Locker's 3Q23 result and revised 2023 guidance showed that trends did not get worse during the quarter (as many other retailers cited).

The company's high promotional activity was reflected in its prior guidance and was not incremental due to a soft consumer environment, Fernández adds. 

In addition, Foot Locker is getting greater vendor support to clear inventory and end the year with inventory dollars flat to slightly down. 

The analyst is particularly encouraged to see sales trends improve through the quarter with the October comp (MSD) vs. August/September (HSD) and the better trend continuing in November and culminating in a "strong Black Friday weekend."

While the higher promotions YoY are driving a higher sell-thru, a better product flow and improved conversion/execution are also helping, per Fernández. 

Foot Locker also made progress in strategic initiatives such as growing strategic brands and increasing the percentage of community and power stores, the analyst adds.

Looking to 2024, the analyst flagged uncertainty around several areas, whether inventories end 2023 clean enough to reduce promotions and begin to recover a portion of the ~300 bps in merchandise margin headwind expected in 2023.

For 2023, the analyst projects EPS of $1.32 vs. $1.35 previously and operating margin compression of ~520 bps to 2.6%, which is unchanged.

For 2024, the analyst models EPS of $2.35 vs. $2.50 and an operating margin of 4.2% vs. 4.3% previously.

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Price Action: FL shares are trading lower by 1.34% to $27.30 on the last check Thursday.

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