Foot Locker
stock tumbled on Monday after analysts at
Citi
downgraded the shoe and sportswear retailer, citing multiple reasons for caution and a share price that had already exceeded their price target.
Foot Locker
(ticker: FL) stock was down 3.7% in early Monday trading after Citi’s Paul Lejuez downgraded the group to Sell from Neutral, holding a price target of $18. The shares finished last Friday at $23.32.
At the heart of Citi’s downgrade are the headwinds that have hit Foot Locker stock for months. A tough macroeconomic backdrop has put pressure on its category. This, paired with elevated inventory levels, has pushed Foot Locker to spend more heavily on promotions—hitting the group’s margins.
“We believe a weakening macro/still elevated inventory levels are driving Foot Locker to be more promotional than planned this fall/holiday…We believe Footlocker will sacrifice margin near-term to get clean on inventory by year-end,” wrote Lejuez. “As we look to [next fiscal year], a complex macro backdrop makes it tough to execute a turnaround…at current levels, we believe the risk/reward skews to the downside.”
When Foot Locker last reported results in August, the group halted its dividend after slashing its annual sales and earnings outlook for the second quarter in a row. Now, Citi is eyeing the likelihood that the company will lower its fiscal-year earnings-per-share guidance again—down to about $1 after lowering the outlook in August to a range of $1.30 to $1.50.
Lejuez has more reason for caution, too, citing Citi’s credit card data that show the athletic footwear and apparel category decelerated from -2% in the second quarter to -6% in the third quarter, suggesting little hope for an upside surprise.
Against this backdrop, “we are downgrading the shares from Neutral to Sell as the stock has risen above our $18 target price,” wrote Lejuez.
There’s also the matter of
Nike
(NKE). Foot Locker said in early 2022 that as a result of
Nike’s
direct-to-consumer strategy, it was not stocking the most in-demand products from the supplier.
“We will be interested to hear how Foot Locker’s relationship with NKE is shaping up considering the weakness Foot Locker is seeing this year,” wrote Lejuez. “Foot Locker is still a major player for Nike, although smaller than in the past, and we’ve seen Nike allocate more product to players like
Dick’s Sporting Goods
(who has exposure to a higher-income consumer), while reducing allocation to Foot Locker.”
Write to Jack Denton at [email protected]
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