Foot Locker upgraded to 'Overweight' on turnaround potential

Foot Locker (FL) shares are rising Thursday morning as Piper Sandler upgrades the stock from "Neutral" to "Overweight," citing a 2023 recovery tied to higher promotional activity and inventory reductions.

While various analysts have expressed concern about Foot Locker's inventory levels, Piper Sandler analysts believe a comeback is possible based on this turnaround.

Yahoo Finance’s Seana Smith and Brad Smith deep dive into Foot Locker's stock performance this year and its current 2024 outlook.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

BRAD SMITH: Foot Locker seeing some gains this morning. The stock is up after Piper Sandler raised its rating on the footwear retailer to overweight from neutral. The analyst behind that call believes the footwear retailer will expand its margin opportunity in 2024. Piper Sandler also sees a favorable mix of full price sales in the new year on recovering inventory levels here.

They have also in their conclusion said that they noticed a shift in investor interest to start looking at turnaround stories. So Foot Locker potentially one of those turnaround stories contemplating a rotation from winners in consumers, such as they note Walmart, TJX, Lululemon, and Deckers Outdoor as well.

SEANA SMITH: Yeah. This is an interesting note to me because Foot Locker is a company that needs some of this optimism coming from the street. Many of analysts have been extremely critical just in terms of those higher inventory levels, promotional activity, everything that has been playing out at the retailer over the last several months.

We just got results recently from the name and they were talking about the fact that promotional activity is likely going to be high in the current quarter because of holiday sales. They need to do everything they can to move some of that inventory out. But this analyst here from Piper Sandler looking past all of that, expecting to see some improvement, cleaner inventory levels.

It was interesting to me what you just called out there just in terms of the fact that she is noticing a bit more investor interest to begin looking at some of these turnaround stories. That was, though, followed by the fact that she was saying that it hasn't yet-- she hasn't yet seen some strong appetite for unprofitable models, high levels of debt.

There is couching it just a bit, but basically saying that if Foot Locker is able to prove that it is making progress on its turnaround story, this could be a name-- given the fact that it's been under a tremendous amount of pressure-- could be a name that's well-positioned here for the longer run.

BRAD SMITH: Yeah, you know, a few things have to go right for this to take place. Number one, the closure of some of the Champs stores. Foot Locker has a bevy of brands underneath of it. It has Foot Locker, it's got, of course, stores within the stores of House of Hoops, and Foot Locker has done really well with the partnership with the NBA even this season as well.

But you think about some of those sub-brands and where those store closures the footprints that aren't necessarily operating up to standard or up to where the profits should of carry on a store-by-store basis. They were expecting to close 85 in 2023 of the Champs stores, about 73 the fourth quarter, and the rest pushed into 2024.

So ultimately, store closures, they're also looking at an element of needing to make sure that you're retaining the basketball kind of customer that's coming into the store in some of those partnerships, and that means really leaning into more of the rebuild in the Nike relationship for Nike. They have been excellent at making sure that they're executing on more of that direct to consumer strategy.

And I think now kind of opening up the opportunity for even more of those retailers who they had had historical relationships with on the wholesale side, but then kind of reset much of that in order to make sure that they could get a lot of the customer data, and then decide, all right, where do we need to kind of allocate a certain amount and what percentage of inventory needs to still go into a Foot Locker? What percentage needs to still go into a Macy's? And what do those wholesale buying habits look like? I think that's one key relationship they've got to get right too.

SEANA SMITH: Yeah. But again, the most recent results that they did report, it was a very strong report, the guidance was better than expected. They are making some headway. They did say that they saw strong traffic over Black Friday weekend holiday shopping weekend. You do your channel checks, what? Twice, three times a week? What do you see then?

BRAD SMITH: Yeah. I've gone in there twice-- twice already this week. Yeah. I was looking for the Jordan Gratitude, the Jordan 11 Gratitude that-- I mean, well, I ordered it on sneakers anyway. So it didn't really matter. But I was seeing if they had it in store.

Well, that's actually what I'll do sometimes is I'll compare to see if something dropped on sneakers one day, and it says it sold out on sneakers, but then I walk in the store and I see it, not only am I upset, but I'm also saying to myself, OK, now they've got inventory that clearly is not sold out at the end of the day. So I don't know, that's why I do some of these store checks from time to time.

SEANA SMITH: Well, and you must. And you're trying to get the best deal too, and try to just get your hands on the product at the end of the day.