Foot Locker (ticker: FL) stock experienced a sharp decline on Monday after an unfavorable downgrade from analysts at Citi. Citing various concerns and an already surpassed price target, Citi’s Paul Lejuez downgraded the shoe and sportswear retailer from Neutral to Sell, setting a price target of $18. In premarket trading, the stock plummeted by 3.6%. It should be noted that on the previous Friday, the shares had closed at $23.32.
Headwinds and Challenges Faced by Foot Locker
At the core of Citi’s decision to downgrade Foot Locker lies the ongoing headwinds that the company has faced for several months. The shoe and sportswear retailer has been adversely affected by a challenging macroeconomic environment. Additionally, elevated inventory levels have resulted in increased promotional expenses, which have further dampened group margins.
Lejuez commented on this predicament, saying, “We believe a weakening macro/still elevated inventory levels are driving Foot Locker to be more promotional than planned this fall/holiday…We believe Footlocker will sacrifice margin near-term to get clean on inventory by year-end.” Lejuez also expressed concerns about executing a turnaround given the complex macro backdrop in the upcoming fiscal year. Currently, he believes that the risk/reward ratio favors the downside.
While these challenges persist, Foot Locker will need to make strategic decisions to navigate the market and improve its performance moving forward.
Foot Locker Faces Challenges as Earnings Outlook Remains Uncertain
When Foot Locker last reported results in August, the group made the decision to halt its dividend. This action came after a significant reduction in its annual sales and earnings outlook for the second consecutive quarter. Now, it seems that Foot Locker may need to lower its fiscal-year earnings-per-share guidance once again. Analysts at Citi predict that the new guidance will be around $1, down from the previously lowered outlook of $1.30 to $1.50.
Citi’s analysis is supported by their credit card data, which reveals a decline in the athletic footwear and apparel category. Specifically, the data shows a deceleration from -2% in the second quarter to -6% in the third quarter. This indicates that there may be little hope for an upside surprise in Foot Locker’s future performance.
Considering these factors, Citi analyst Lejuez has downgraded the shares of Foot Locker from Neutral to Sell. This decision is based on the stock’s recent increase above Citi’s $18 target price.
Another significant factor impacting Foot Locker is its relationship with Nike (NKE). In early 2022, Foot Locker announced that it was not stocking the most in-demand products from Nike as a result of Nike’s direct-to-consumer strategy. Lejuez highlights the importance of monitoring this relationship, given the challenges Foot Locker is currently experiencing. Although Foot Locker remains a major player for Nike, it is now smaller in comparison to the past. Nike has been allocating more products to retailers like Dick’s Sporting Goods, who cater to a higher-income consumer, while reducing their allocation to Foot Locker.
In summary, Foot Locker faces multiple challenges as its earnings outlook remains uncertain. The impact of these challenges is reflected in Citi’s downgrade of the company’s shares and the ongoing changes in its relationship with Nike.
