Cross-related business trends of one company often help other companies in their food chain. This definitely can be true in the world of retail and apparel, particularly in an age in which the retail apocalypse seems to have been sped up by years thanks to COVID-19.
According to BofA Securities, Foot Locker Inc. (NYSE: FL) should see its recovery continue. The firm raised its rating in a two-notch upgrade to Buy from Underperform and it lifted its price objective to $50 from $20. If the firm’s Robert F. Ohmes and Alexander Perry are correct, then Foot Locker just went from having over 40% potential downside to having almost 35% in potential total return upside, if its dividend is included.
The BofA team specified that Nike Inc. (NYSE: NKE) product cycles are positioning Foot Locker well for the coming holiday sales trends. In fact, the report even suggests that Foot Locker is the cheap way to ride Nike’s growth higher.
The firm raised its fiscal 2021 earnings per share estimate to $2.55 from $2.10 to reflect strong same-store sales trends. This valuation for Foot Locker is just 10 to 11 times its updated fiscal 2022 forecast of $4.90 earnings per share, versus a prior forecast of $3.50 per share.
Remember that no single analyst call should ever be used as the sole basis for making buy or sell decisions, even when they have the strongest conviction. The Refinitiv consensus analyst price target is $33.61 a share, and BofA’s $50 price target now exceeds the prior highest sell-side analyst target price of $45.
According to BofA, Foot Locker’s momentum improved significantly in September and October, with a shift in its back-to-school sales and Nike product momentum. The report also specified positives from Air Force 1, Air Jordan 1, Blazer and Retro Jordan, and the firm believes these should continue to drive same-store sales higher. BofA also pointed out that Nike is an estimated 71% of sales.
BofA used several other metrics to evaluate further upside. Its own credit card read-through data for 129 mall-based retailers shows that spending turned positive in September and October. It has noted that mall traffic trends continue to recover as other competitors suggest that momentum in premium athletic footwear remains strong and that the strength should continue through the holidays with limited promotional activity. Foot Locker’s own web traffic and Google Trends were also shown to have accelerated in September.
Foot Locker is said to be positioned for potential market share tailwinds as one of Nike’s differentiated strategic wholesale customers. BofA also believes that Nike intends to build long-term momentum with its top customers and that approximately 70% of Foot Locker’s domestic stores are located within two miles of an account Nike is exiting or that has seen significant store closures. The report cited compelling valuation at about eight times its fiscal 2022 estimate. It said:
Long-term market share tailwinds including competitor store closures and shifting Nike product allocations supports a multiple more in-line with other ominchannel retailers that have a strategic relationship with Nike (trading at ~13X), in our view. We also believe Foot Locker offers investors a “discounted” way to play Nike momentum.
While the report is a massive potential win for Foot Locker, Nike’s shares have surged since the March lows. The stock even recently went to all-time highs at $131.55 (versus $129.50 on last look). Nike’s Refinitiv consensus earnings estimates are $2.85 per share for 2021 and $3.67 for 2022, valuing it at almost 40 times a blended forward earnings estimate.
BofA is not alone in its more favorable views on Foot Locker. The shoe retailer was raised to Overweight from Equal Weight at Barclays earlier this month, and Argus raised its rating to Buy from Hold in September.
As for Nike itself, BofA rates Nike as Buy with a $150 price target, which implies roughly 16% upside to its above-consensus price target.
Foot Locker shares traded up about 2% at $38.40 on Tuesday morning. Its consensus target price is $33.61, and its 52-week trading range is $17.46 to $47.86.
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