Foot Locker, Inc. (FL): Buy the Weakness, Says Canaccord

Foot Locker, Inc. (NYSE:FL) investors got cold feet today, sending shares tumbling nearly 15% in Friday’s trading session. The reason? While FL topped fourth-quarter earnings estimates, revenue and same-store sales missed and the athletic footwear firm sees weak trends continuing in Q1.

However, Canaccord analyst Camilo Lyon keeps the spirit up, reiterating a Buy rating on Foot Locker shares, with a price target of $67, which implies an upside of 74% from current levels. (To watch Lyon’s track record, click here)

Lyon wrote, “As we expected, gross margin compression of -239bps vs. our -224bp estimate was due to clearance of slower-turning footwear platforms. Given the importance of moving through excess inventory, we are not concerned at all by the slight gross margin miss as inventory contracted -2.2% (-5.2% exFX). Overall, we believe FL is making the needed progress on turning around its business, thus positioning 2018 for the recovery we are looking for.”

“For 2018, comps are expected to be flat to up LSD, gross margin to improve, and EPS to be up double digits. Given this DD EPS guidance, it appears as if consensus needs to come up as current estimate of $4.53 implies only a 10% increase in EPS. That said, based on consensus, the stock is trading at ~9x 2018E EPS, a multiple that in our opinion is far too low for a business that should see sequentially improving trends and rising estimates,” the analyst contiued.

Bottom line: “We have been vocal that we expect trends to inflect in Q2, driven by increasing allocations of on-trend product (e.g. Air VaporMax) and the scaling of new platforms (e.g. Epic React, Air Max 270) coupled with a product pipeline from Nike that appears to be accelerating as the year progresses. Furthermore, an improving product assortment should coincide with a recovery in merchandise margins.”

Out of the 14 analysts polled by TipRanks (in the past 3 months), 10 rate Footlocker stock a Buy, while 4 rate the stock a Hold. With a return potential of 46%, the stock’s consensus target price stands at $57.08.


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