Business Case Builds For Foot Locker

Shares of Foot Locker NYSE: FL were down almost 3% on Friday after the company reported third-quarter earnings. EPS beat estimates but revenue fell below where analysts were expecting. The miss here along with narrowing revenue guidance from management fed the bears and sent shares down.

The stock has struggled in recent years to get back to its 2017 highs and shares are down over 40% in the past 6 months. Friday’s release had a lot of positive signs but these weren’t enough to send the stock into the weekend on a good note.

FL stock has a history of big moves on the back of earnings releases. Within the past 3 years, there have been 3 occasions where brutal earnings sent the stock down over 20% in the days after. If Friday was a bad release, investors are surely breathing a sigh of relief that the stock only took a 3% dip.

Though initially up in pre-market trading, shares gapped down 6% on the open and sunk a full 10% from Thursday’s close before catching a solid bid that put them at their daily high by the session’s close. Technically speaking, this is the kind of action that makes the bull case plausible.

With comparable-store sales were up 6% and gross margins were up over 30%, there is positive forward momentum happening under the hood and the fundamentals are going in the right direction.

The company’s CEO Richard Johnson highlighted the ‘great strides’ the company had made across its key initiatives, in particular, elevating customer experience and driving productivity in its workforce.

This release could have been so much worse. Last quarter earnings did not make for pretty reading as every metric dipped. However, it looks as if management’s initiatives are finally starting to bear fruit and the stock and at these levels, the stock presents an interesting growth opportunity.

Nike Lends Its Weight

As we mentioned in last week’s article, bulls can also buy into the Foot Locker’s deepening partnership with Nike NYSE: NKE who recently announced they’ll no longer be selling their shoes on Amazon NASDAQ: AMZN. They’re looking to give customers a premium experience while also collecting data on their buying habits, two things they believe they can achieve with Foot Locker, but not with Amazon.

This comes on the back of Nike’s collaboration in Foot Locker’s newest store in New York. The 9,000 square foot shop is what’s known as a Foot Locker ‘Power Store’. These Power Stores have been springing up across the world throughout 2019 and are heavily influenced by the community they’re based in. They showcase local designers, artists, and influencers and have started to revolutionize what a brick and mortar store can be. In a sign of high management are aiming, they have plans to open 50 of these Power Stores in the next 3 years.

With the world’s largest e-retailer no longer offering Nike shoes, Foot Locker is positioning itself as the new natural destination for buyers.

The Long Case

It will always look bad when shares finish down after an earnings release but Friday’s intra-day action tells a different story. There was a strong bid seen in pre-market trading and these buyers took control again after the initial opening flush. Being able to close right at the high of the day as we went into the weekend will have made sellers a little nervous.

Shares have found solid support in the $30-$35 range in recent years are this isn’t a bad area to work orders if investors are thinking about getting long. RSI is below 30 which suggests shares are oversold at these levels, just another reason to consider the case for getting long.

On top of all this, a PE ratio of 11 makes a good argument for this being a solid value play without too much fundamental downside.

Analysts at Susquehanna upgrading their rating at the start of November and investors will be watching closely to see if there’s anyone else going to join them in calling shares a ‘buy’. There’ll be no surprises if they do. After taking a beating over the past few years, Foot Locker finally looks like it wants to fight back.