Barclays Upgrades Foot Locker Shares
Barclays analysts upgraded shares of Foot Locker (NYSE:FL) from Neutral to Buy on Thursday, following a robust second quarter of 2024 that showcased several fundamental improvements.
Key Improvements
- Sustainable Positive Comparable Sales: Return to a positive sales trajectory.
- Fixed-Cost Leverage: Conditions are set for better management of fixed costs.
- Merchandise Margins: A 20 basis point improvement noted (excluding FLX rewards charge impact).
- Sales-to-Inventory Spread: Ongoing progress reported in inventory management.
- Full-Price Selling Increase: Growth in full-price selling in the U.S. as promotional activities diminish.
Challenges Ahead
Despite these positives, analysts highlight uncertainties associated with Foot Locker’s exit from various international markets, anticipated to exert short-term pressure on merchandise margins. Additionally, the planned relocation of Foot Locker’s headquarters from New York City to St. Petersburg, Florida, by late 2025 presents potential operational challenges.
“Headquarter moves often come with unknown execution and operational risk, disrupting business continuity,” analysts warn.
However, they emphasize focusing on recognized fundamental improvements while also recognizing future risks due to corporate actions.
Future Outlook
The analysts are increasingly confident that recovering merchandise margins will significantly impact the second half of 2024, especially in Q4, as the company manages high levels of clearance inventory. They believe the positive business turnaround will lead to earnings and margin growth in the next 12 to 18 months prior to any potential disruptions from the headquarters move.
“FL’s positive quarter is being overshadowed by uncertainty over corporate restructuring,” they added.
With favorable near-term visibility regarding the business recovery, they view the risk/reward as attractive, hence upgrading shares to Overweight.
Barclays also increased the price target on FL stock from $27 to $34.
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