Foot Locker’s (FL) reported strong financial results on Friday, but its shares dropped sharply following the report. I’m neutral on FL
The athletic footwear and apparel retailer reported a Q3 non-GAAP profit of $1.93 per share, up from $1.21 in Q3 2020, and $1.13 in Q3 2019. Q3 comparable-store sales rose 2.2%, with total sales up 3.9%, to $2.2 billion in the third quarter of 2021, from $2.1 billion last year.
“The third quarter was another period of strong performance for our Company that reflects the powerful connectivity we have built with our customers,” said Richard Johnson, chairman and CEO. “These impressive top and bottom-line results were against a robust back-to-school season from last year and in spite of the ongoing supply chain challenges. On top of that, we successfully completed the acquisition of WSS in the third quarter, and subsequently closed the atmos transaction as well, welcoming both of these great teams to the Foot Locker, Inc. family.”
Nonetheless, Wall Street didn’t welcome Foot Locker’s financial report, sending its shares 8.4% lower since announcing the results. Over the last 12 months, the company’s shares have delivered a 37.7% gain, but they lagged the specialty retailing industry, which showed a 77% gain. (See Analysts’ Top Stocks on TipRanks)
Lack of Specific Guideline and Nike Concerns
Quo Vadis president John Zolidis, a long-time follower of the company, thinks that Wall Street’s adverse reaction to Foot Locker’s report is due to a lack of specific guidance around the fourth quarter and the headline that “supply chain constraints will persist throughout 4Q.”
That’s something markets knew ahead of time, though. That’s why Zolidis thinks the real problem is somewhere else in the debate about whether the company is overearning. “The bears believe the recent improvement in sales and margins are temporary,” he says. “Analysts are modeling both down in future years. The stock was recently trading at the lowest multiple in the group and well below historical valuation multiples. This would make sense if earnings were benefiting from a confluence of 1x post-COVID benefits that will reverse.”
There’s a lingering concern on Wall Street on Foot Locker’s relation with Nike (NKE). Recently, the athletic apparel leader has shifted from an indirect to a direct business model, raising fears that Nike will cut its relations with Foot Locker. However, Zolidis thinks that Nike’s new business model will benefit rather than hurt Foot Locker.
“We believe that changes in Nike distribution practices, together with a strong consumer, have created a structural and durable uplift in gross margins for the entire NKE distribution eco-system, of which Foot Locker is the most important part,” he says. “Gross margins were up 390 bps on a one year-basis in 3Q and 260 bps on a two-year basis (to pre-COVID results). For the first three quarters of 2021, gross margin has held in a very tight range of 34.7% to 35.1%. Our message: It’s staying there. “
Wall Street’s Take
The analyst community is on the same side as Zolidis. It rates Foot Locker a Moderate Buy, with an average price target of $64.88, with a high forecast of $81 and a low forecast of $45. The average price target represents a 22.6% upside potential.
TipRanks Stock Analysis System assigns a Smart Score of 5 out of 10 to Foot Locker’s stock, citing decreased hedge fund activity, negative technicals, and very negative investor sentiment.
Conclusions
Wall Street needs further clarity on Foot Locker’s profit metrics, supply chain, and relationship with Nike before warming up to the company’s shares.
Disclosure: At the time of publication, Panos Mourdoukousas had a position in the securities mentioned in this article.
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