Citi Names 'Controversial' Foot Locker As Its Top Footwear, Apparel Pick

Foot Locker Inc FL has done the unthinkable.

After suffering through an abysmal 2017, the footwear retailer has climbed to the top of Citi’s Buy list for 2018.

The Analyst

Kate McShane of CitiBank reiterated a Buy rating on Foot Locker and raised the price target from $47 to $54.

The Thesis

Although shares have recovered ground following some notable upgrades, Foot Locker may now be an even more controversial play heading into 2018 given the uncertain athletic environment and the deterioration of comps and margins in 2017, McShane said in a Monday note. (See the analyst's track record here.) 

McShane said she came away from Foot Locker's Q3 report Nov. 17 results feeling better about Foot Locker for a host of reasons: comps that fell less than expected, an improved fourth-quarter outlook, increasing buybacks and investments in digital and new Nike Inc NKE partnerships.

“We point to these reasons for why we think EPS numbers will move higher for next year and are moving Buy-rated FL to the top of our apparel and footwear picks,” McShane said. 

Nike’s upcoming second-quarter report Dec. 21 is expected to give even more clarity for the Foot Locker thesis heading into 2018, the analyst said. 

The 800-pound gorilla that is Amazon.com, Inc. AMZN has played a significant role in the uncertainty of Foot Locker’s future. Analysts have gone back and forth as to whether the e-commerce giant will disrupt the entire industry, but now it appears that Amazon likely won't have a material effect on the footwear retailer.

“We think shares still look cheap relative to other retailers and think multiple expansion is possible given that the perceived secular pressures (Amazon and vendors going direct) are probably not as big of a threat as once thought, given new Nike Partnerships and an unlikely overlap in product with Amazon."

Price Action

Foot Locker shares remained relatively flat and were down slightly at $46.30 at the time of publication. 

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