The risk to Foot Locker, Inc’s (NYSE: FL) revenue and EBIT margin seem priced in, following the massive year-to-date pullback in its share price, according to Morgan Stanley.
Morgan Stanley’s Lauren Cassel upgraded Foot Locker from Underweight to Equal-Weight, maintaining the price target at $40.
The trend of consumers shifting to shopping directly with brands has put Foot Locker’s revenue and EBIT margin at risk, Cassel said. The company has reported ongoing EBIT margin declines so far in 2019.
“We continue to prefer brands over retailers, and our AlphaWise survey results suggest Foot Locker, among others, continue to lose traction in an increasingly direct-to-consumer (DTC) world,” the analyst wrote in a note.
The company is scheduled to report its second-quarter results Aug. 23 and management’s guidance appears more achievable than last quarter, Cassel mentioned.
She added that the stock could “re-rate meaningfully higher” if Foot Locker manages to deliver comp of 5% or more, regardless of the margin result. The buy-side expectations are set at 3.5-4%.
The second-quarter guidance reflects gross margin of flat to -20 bps and SG&A deleverage of 80-100 bps, which appears “potentially beatable,” Cassel said.
Shares of Foot Locker traded around $40.54 Thursday afternoon.
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