It’s been a great start to the week for Foot Locker (NYSE:FL). Keep in mind that the shares have been in a downtrend during the past three months. But as of Monday, Foot Locker stock jumped by 5%.
The reason: Wells Fargo (NYSE:WFC) analyst Tom Nikic issued an upbeat report. He thinks that Nike (NYSE:NKE) will be the main catalyst, as the company has been launching standout new shoes (like the Air Max), there has been improvement in the European market and the Michael Jordan brand has been getting back into shape.
In light of all this, Nikic upgraded his price target on Foot Locker stock from $50 to $58 (this implies 20% upside from current levels). His forecast calls for 2% growth in comparable-store sales in Q3 and 3% in Q4. This is likely to be the case even if there is a loss in momentum from Adidas (OTCMKTS:ADDYY).
Long before this, though Foot Locker already had been showing improvement. Just look at the latest quarter. Revenues increased by 4.7% to $1.78 billion and earnings came to 75 cents a share, up from 62 cents on a year-over-year basis. The Street, on the other hand, was looking for $1.76 billion on the top line and earnings of 70 cents a share.
Yet Wall Street was not impressed and Foot Locker stock plunged 10% on the news.
Why so? Note that investors focused on the weak comparable-store sales of 0.5%. By contrast, other major retailers like Walmart (NYSE:WMT), Target (NYSE:TGT) and Kohl’s (NYSE:KSS) posted much stronger growth.
What’s more, the SG&A (Selling, General and Administrative) costs were up by 140 basis points. Some of the drivers for this included investments in digital systems and higher levels of incentive compensation.
Foot Locker Stock and the Nike Factor
It’s true that ecommerce giant Amazon.com (NASDAQ:AMZN) continues to disrupt the traditional retail market. So Foot Locker does look kind of like an anachronism, right?
Perhaps not. As seen with its sales and profits, the company is certainly holding its own. The company also has the benefit of being highly strategic to Nike. After all, Foot Locker has attractive demographics, focused on those between the ages of 30-to-49. The category has a propensity to spend on premium products.
Besides, Foot Locker has the advantage of a strong team that knows how to gauge consumer interests across diverse geographies and channels. The company also has been rethinking its store formats. To this end, it has developed Power Stores, which provides for immersive and digital experiences.
Bottom Line on Foot Locker Stock
Foot Locker has pursued a disciplined strategy, which recognizes the challenges of the retail sector. Consider that this year the company plans to shut down 100 stores and open up only 40.
As for ecommerce, there has been a centralization of the platform, which should allow for stronger results. There has also been a major investment in the direct-to-consumer infrastructure. Foot Locker is in the process of building two mini hubs that will provide next-day service to over 6,000 ZIP codes in the U.S.
OK then, so what about Foot Locker stock? What now? For the most part, the valuation has baked in many of the issues already. Consider that the forward price-to-earnings multiple is only 10X. The Foot Locker dividend is also a decent 2.9%.
So in light of the expected traction with Nike and Wall Street’s renewed interest in the retail sector, Floor Locker stock does look attractive at current levels.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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