Footlocker Withers Under Nike’s Shadow
While Footlocker (NYSE: FL) could come out and surprise the market on Friday when it reports we aren’t going to hold our breaths waiting for share prices to rebound. A number of factors are weighing on share prices and we see those forces driving the stock lower. Among them is the institutional activity. The institutions still own 83% of the stock and their activity over the past 4 quarters is balanced but that is where the good news ends.
While the activity is balanced over the past 4 quarters the institutions have been net sellers the last 3 consecutive quarters and the bearish activity reached a peak in Q2 (and Q2 isn’t over). This shift began at the end of last year when Footlocker's growth and earnings came into question and it accelerated after the Q4 results. The Q4 results show the impact of Nike’s (NYSE: NKE) attempts at DTC (successful from what we can tell) and that impact is only going to grow as Nike builds out its digital empire. It is our assumption the Q1 results will show more of the same and may increase the institutional selling.
The Analysts Sour On Footlocker
And the analysts aren’t helping either. The analysts are rating Footlocker stock as a firm Hold with a price target more than 45% above the current price action but is trending lower. The Insidertrades.com consensus sentiment is down from a strong Buy last year and the price target is down in the 12, 3, and 1-month comparisons and double-digits in both the 12 and 3-month comparisons. Footlocker is deeply undervalued at only 6X its earnings and may spring higher but we don’t see it moving significantly above the short-term moving average at this time.
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Analyst John Kernan of Cowen had this to say when he lowered his rating to Marketperform from Outperform … "While our estimates are fairly in line with guidance for FY22, incremental inflationary trends (supply chain and labor) may be underappreciated into 2H:22 and FY23. Valuations for mall-based businesses are converging at all-time lows, and we do not see a financial catalyst for change. Without better traffic (digital and in-store) the business may not take advantage of improved inventory flow in 2H."
Expect Tepid Results From Footlocker This Quarter
The analysts aren’t predicting a bad quarter for Footlocker but they also aren’t forecasting growth or margin improvement either. What they are looking for is a sequential decline in revenue to just above last year’s Q1 results. This is flat on a YOY basis and comes with margin compression as well. Margins are expected to decline by several hundred basis points and produce a sequential and YOY decline in adjusted earnings but that is not the real risk for this stock. The real risk is the guidance and we think it may get lowered again.
Footlocker is heavily dependent on Asia and China for its manufacturing which puts it in a very bad place right now, and that’s not counting shipping challenges either. The company had sufficient inventory at the end of the last quarter but, with Chinese production halted in many areas and sales still strong, we expect inventory has come down and will have an impact on sales. That combined with sluggishness in retail and inflation cutting into consumer discretionary spending suggests to us Nike is not going to have a good 2022, not compared to what the market was expecting at the beginning of the year, anyway.
Turning to the chart, price action in Footlocker took a turn for the worse following the Q4 results and are trending at the lows of the movement. This action is aided by institutional selling and has the stock set up to move lower. A move below the $26.70 level would be bearish and could take the stock back to its pandemic lows.
Companies in This Article:
|Company||Current Price||Price Change||Dividend Yield||P/E Ratio||Consensus Rating||Consensus Price Target|
|Foot Locker (FL)||$25.13||-0.5%||6.37%||3.14||Hold||$42.19|