Baird Remains Confident In Nike, Prefers Foot Locker

Sportswear over performance continues to be the path for growth in athletic apparel, according to a new Baird report.

The Analyst

Baird analyst Jonathan Komp maintained a Neutral rating on Nike with an $87 price target.

Komp maintains an Overweight rating on Foot Locker with a $77 price target.

The Thesis

After Nike Inc NKE filed its latest 10-Q last week, Komp said the disclosures demonstrate improving fundamentals in the form of strengthening premium footwear sales combined with gross margin improvements.

Nike has notably shifted back to a healthier pull market in North America, where footwear sales grew 8 percent and average selling prices increased 7 percent, the analyst said in a Tuesday note. Nike’s newer premium platforms continue to resonate, he said.

"Sportswear was the main driver ... with Running and Jordan footwear also contributing to footwear sales growth."

Still, Komp said to wait for a pullback in Nike to enter the stock.

“While we remain confident in the outlook for NKE, somewhat limited near-term EPS upside combined with full valuation keep us looking for a better near-term entry point closer towards the mid-$70s for the stock."

The combination of growth from smaller footwear brands combined with Nike’s comeback bodes well for Foot Locker, Inc. FL, Komp said.

For the fourth consecutive year, the mix of Foot Locker’s purchases from Nike declined to 66 percent of total sales, down from 67 percent in 2017 and a peak of 73 percent in 2014, the analyst said.

Komp said this implies that Nike purchases were flat to slightly up in 2018, and all other small brands outside the top five gained 10 percent and were possibly up 40 percent in dollar terms.

“We suspect the slight reduction in NKE’s penetration reflected very strong growth for other smaller brands,” he said.

“Importantly we think the NIke performance likely inflected during FL’s F2018 and has significant room for upside from the current trough levels."