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Morgan Stanley Upgrades Foot Locker On Valuation, Q2 Print May Support Shares

Priya Nigam

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.

The Analyst

Morgan Stanley’s Lauren Cassel upgraded Foot Locker from Underweight to Equal-Weight, maintaining the price target at $40.

The Thesis

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.

Price Action

Shares of Foot Locker traded around $40.54 Thursday afternoon.

Related Links:

Is Another Potential Acquisition Coming For Foot Locker? Analyst Looks At European Market

Analysts Mixed On Foot Locker Following Strong Q4 Earnings

Latest Ratings for FL

Date Firm Action From To
Aug 2019 Upgrades Underweight Equal-Weight
May 2019 Maintains Buy
May 2019 Maintains Underweight

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