Ever one to keep even the most light-footed investor on his toes,
Foot Locker (NYSE: FL) has been making all the right kinds of headlines of late. This is bucking the trend as they have a long history of causing
mania or depression with their earnings reports. Unfortunately, in recent years there’s been much more of the latter. A quick look at their stock chart shows multiple gap downs, the vast majority on the back of
a bad earnings miss.
The long-term downtrend that shares have been in since 2017 has for the most part been characterized by bad misses with some gleeful beats, with little consistency for investors to cling to. Coming into COVID-19, shares were trading at 2014 levels and then the pandemic and, you guessed it, another bad earnings miss sent them back to 1986 prices.
Bucking The Trend
But hope springs eternal and since the lows of Q1, Foot Locker has been fighting hard to prove to Wall Street that it’s got some kick left in it. Shares are up more than 100% since March and more importantly, are just after breaking out to the upside after consolidating throughout the summer. They’re just about back to pre-COVID levels which have become a major benchmark for stocks to judge their 2020 performance by. With regards to this latest rally, any guesses for what’s caused it?
Towards the end of August, the New York-headquartered company released its Q2 numbers. Non-GAAP EPS came in above the consensus while revenue was up a healthy 17% year on year. More importantly, however was the reinstatement of the company’s dividend which had been halted at the onset of COVID. A move like this speaks volumes to a company’s confidence and investors and Wall Street weren’t slow about picking up on it.
Within a few days, Susquehanna reiterated their Positive rating on the stock and set their sights on a promising Q4 rebound. The return of the dividend was for them, a major signal from management that things are looking good.
Shares were already up 20% from the earnings release in early September when Goldman Sachs came out with a fresh Buy rating on them. Having digested the earnings report, they were particularly bullish on Foot Locker’s balance sheet and felt it was undervalued at current prices.
Fresh Upgrades
In a note to clients they said "we see Foot Locker as a competitively positioned retailer with several enduring tailwinds given its strategic importance to key vendors, strong category dynamics and product cycles, market share consolidation opportunities, and a step-up in digital connectivity. While we recognize potential for near-term volatility given an uncertain consumer recovery path associated with COVID-19, we believe Foot Locker's solid balance sheet, net cash position, and national footprint positions the shares for outperformance."
The momentum has hung around since then with the stock now up about 40% since August’s release. And with a fresh upgrade from Barclays on Wednesday, it looks like this rally has room to run. As part of a wider bullish upgrade to their retail coverage, Barclays moved Foot Locker shares to Overweight from Equal Weight and upped their price target to $39.
Analyst Adrienne Yih noted how "in the wake of COVID, the Retail segment is: 1) reducing supply on multiple levels and 2) forcing store closures as e-commerce growth accelerates. In 2021, we foresee a return to brick-and-mortar sales growth and lean inventory supporting EBIT margin expansion.”
It’s been a run of good news for the athletic apparel company and sorely needed. They’ve put investors through the wringer enough times in recent years and those who’ve stuck around are due a break while those only getting involved have plenty to be excited about. While there’s sure to be a few surprises in store along the way, for now at least Foot Locker is running well.
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