Foot Locker (NYSE: FL): Long Term Potential, but Sentiment May Weigh on Stock Price in the Medium Term

August 22, 2022
  •  Updated
August 22, 2022
Source: Shutterstock

Key Takeaways from This Analysis:

  • Foot Locker’s share price rallied 24% after the company beat EPS estimates and appointed a new CEO.
  • 12-month price targets raised, but the stock is already trading within the new target range.
  • Valuation does appear very reasonable, but market conditions may continue to weigh on the stock price in the medium term.

Foot Locker’s ( NYSE: FL ) share price surged as much as 24% on Friday after the company released its second-quarter results. While revenue was in-line with consensus estimates, EPS were 25% higher than expected. In addition, the company announced the appointment of Mary Dillon as CEO.

At least five analysts have already raised their price targets, and the valuation appears reasonable at first glance. But investors may need to manage expectations as the stock is already trading in the new target range.

Second quarter earnings summary

  • Revenue: $2.07 bln, down 9.2% and in line with consensus estimates
  • Non GAAP EPS: $1.10, down 50% but $0.29 better than expected.
  • Comparable same-store sales were down 10.3% from a year ago.

Full-year guidance:

  • Sales are expected to be 6-7% lower than 2021 - slightly worse than previous estimates.
  • Non-GAAP EPS to be between $4.25 and $4.60 - slightly better than previous guidance.
  • Comparable sales are expected to be down 8-9% - slightly better than previous estimates.

See our latest analysis for Foot Locker

Foot Locker is facing two major challenges at the moment. On the one hand, record revenue growth in 2021 set a high bar for the company to beat. At the same time, the current inflationary environment leaves consumers with less discretionary income while increasing costs.

In addition, the company’s largest supplier, Nike, is now competing with the company by increasing its own direct-to-customer marketing efforts. 

With all these challenges it isn’t surprising to see the stock price trading 45% below the 2021 high. But, it also appears - at first glance - to be trading at a very attractive valuation of just 7x EPS.

Mary Dillon takes the Helm

The positive reaction from the stock price appears to have as much to do with the appointment of Mary Dillan as CEO as it does with the EPS beat. Dillon has a strong track record with leadership roles at McDonald's, Ulta Beauty, and US Cellular. Her experience in retail, marketing to consumers, and e-commerce should give some new energy to Foot Locker’s growth strategy.

Foot Locker has been a Value Play - could it become a growth story?

A quick glance at the Simply Wall St snowflake suggests Foot Locker is more of a value play than a growth stock. These ‘snowflake’ graphics help us to visually compare stocks according to valuation, future growth forecasts, past performance, financial health, and dividends. Footlocker scores well on all but the future (i.e. growth) metric.

NYSE:FL Simply Wall St Snowflake, 22nd August 2022

The chart below reflects the average analyst price target 12 months out as it was before these results were released, which suggested little upside on the horizon. Analysts have already raised their targets to the $38 to $43 range, which once again is in line with where the stock is now trading. So once again analysts don’t see much upside in the near term.

NYSE:FL Average analyst price targets 19th August 2022

Our estimate of the fair value for the stock based on earnings estimates is $56 which suggests there may be more upside. However, this estimate is based on longer-term forecasts which probably don’t account for current market conditions and sentiment. 

What this means for investors

Foot Locker has a very strong brand and operates in a market segment that has proved to be resilient over the long term. On the face of it, the share price does appear to be very reasonably valued. 

But the business, and the stock price, may remain under pressure while inflation remains high, and until guidance begins to improve. The new CEO may also improve the growth trajectory in the future, but investors may want to wait for evidence before assuming that’s a given.

The bottom line is that it may take time for upside to materialize, and investors should manage their expectations. To learn more about the company, have a look at our full analysis for Foot Locker which is updated each day.

Simply Wall St analyst Richard Bowman and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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