Footlocker stock upgraded to Buy at Barclays amid ‘several fundamental inflections’

Barclays analysts on Thursday upgraded shares of Foot Locker (NYSE:FL ) from Neutral to Buy, following a strong second quarter of 2024, which highlighted “several fundamental inflections.”

These include a return to sustainable positive comparable sales, setting the stage for better fixed-cost leverage, a 20 basis point improvement in merchandise margins (excluding the impact of the FLX rewards charge), ongoing progress in the sales-to-inventory spread, and an increase in full-price selling in the U.S. market as promotional activities are reduced.

However, the analysts also note that these positive developments are tempered by greater uncertainty due to the company’s exit from several international markets, which is expected to put short-term pressure on merchandise margins.

Moreover, the planned move of Foot Locker’s headquarters from New York City to St. Petersburg, Florida, slated for late 2025, could introduce further challenges.

"Headquarter moves, in our opinion, often come with unknown executional and operational risk, which can be disruptive to business continuity," the analysts caution. "However, we choose to focus on the known fundamental improvements while acknowledging potential future risk from corporate actions."

The analysts express growing confidence that the recapture of merchandise margins will have a more pronounced impact in the second half of 2024, particularly in the fourth quarter, as the company cycles through significant levels of clearance inventory.

They believe that the near-term positive effects of the business recovery will drive earnings and margin growth over the next 12 to 18 months, before any potential disruption from the headquarters move might occur.

"We believe FL’s positive fundamental quarter is being overshadowed by uncertainty over the mid-to longer-term corporate realignment actions,” Barclays’s team continues.

“Given the near-term visibility on a turnaround in the core business, we believe the risk/reward at current levels is attractive and upgrade shares to Overweight.”

Barclays also raised the price target on FL stock from $27 to $34.

Source: Investing.com