Why 2 Foot Locker Analysts Are Downgrading Stock After Q4 Earnings: 'We Were Not Expecting This'

Sports apparel and footwear retailer Foot Locker Inc FL reported fourth-quarter financial results Friday.

The earnings report resulted in downgrades by Seaport Research and Morgan Stanley. Here's what the analysts had to say. 

The Foot Locker Analysts: Seaport Research analyst Mitch Kummetz lowered the rating from Buy to Neutral and has no price target on the stock.

Morgan Stanley analyst Kimberly Greenberger lowered the rating on Foot Locker from Equal-weight to Underweight and cut the price target from $47 to $23.

The Key Takeaways: Kummetz said the thesis on Foot Locker and its relationship with Nike Inc NKE was wrong, leading to the downgrade and a “lack of conviction in the numbers and story.”

Purchases from Nike are declining for Foot Locker, going from 70% in fiscal 2021 to 60% in fiscal 2022, the analyst said. 

“We were not expecting this. We believed that the risk was the primary bear thesis on FL, which meant our bull thesis had hinged on this risk being overblown,” he said. 

Foot Locker is guiding for fiscal 2022 revenue below consensus and pre-COVID levels, Kummetz said. 

“We still like that FL is focused on customer engagement, evidenced by its growing loyalty program.”

The analyst highlights GOAT as underappreciated and investments in WSS and atmos as opportunities for growth.

A risk remains that Nike could cut back sales to Foot Locker even further and could drop Foot Locker entirely, as it has done with other retailers, he said. 

“This now looks like a prove-me story, which suggests dead money.”

Foot Locker's revenue and cash generation potential were questioned by Greenberger due to the weakened Nike sales.

“Foot Locker announced a long-term strategy to diversify its merchandise and vendor mix, whereby no single vendor will comprise more than 55% of total supplier spend compared to 65% as of 4Q21,” the analyst said. 

This shift will lead to a cut in revenue and a lack of other strong brands to make up the difference, she said. 

"Foot Locker acknowledged that none of the brands they’ve substituted for NKE thus far have the same or close to the same productivity that NKE generates."

FL Price Action: Shares of Foot Locker were up 7.98% to $31.39 Monday. Shares hit a new 52-week low of $26.36 on Friday.

Related Link: Nike Buys Digital Sneaker And Fashion Brand RTFKT: What Investors Should Know 

Public domain photo via Wikimedia.