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Hold Off on Foot Locker Stock on Supply Chain Uncertainties

Posted on Friday, February 28th, 2020 by Chris Markoch

Hold Off on Foot Locker Stock on Supply Chain Uncertainties

Foot Locker (NYSE:FL) stock is slightly up after a mixed earnings report. The company beat analysts’ estimates for earnings. However, it came in slightly lower in revenue (basically flat). The stock was getting a positive boost. In mid-day trading, on February 28 the stock is up over 7.5%.

FL stock is evidence that, despite the turmoil in the market, things companies will still issue earnings reports. Analysts will still deliver their opinions. And the stock will move up or down accordingly. So what can investors take away from Foot Locker’s report?

First, comparable-store sales decreased 1.6%. This is one of the most closely watched metrics. Foot Locker’s CEO Richard Johnson cited a shorter holiday season as one of several factors to explain the decline.

“While we had leading positions in key on-trend footwear styles, this was not enough to offset softer than expected demand during the compressed holiday season, a very promotional marketplace for apparel, and tough launch comparisons.”

The unknown will weigh on Foot Locker stock

However, in the case of Foot Locker a problem is that the company does not yet have a sense of how the coronavirus will impact their sales. Remember Foot Locker doesn’t make shoes, but the brands they sell such as Nike (NYSE:NKE) and Adidas (OTCMKTS:ADDDF) have huge exposure to China. In a sense, it’s the same issue that’s causing Apple (NASDAQ:AAPL) stock to decline.

To illustrate this point, Adidas announced that China sales dropped 85% between the beginning of the Chinese New Year and February 19, 2020. Nike has already closed half of its Chinese locations.

Said Johnson, “Clearly, it’s a fluid situation and we’ve built into the guidance what we know today. It’s easy to say that what we know today will be different to what we know tomorrow, right? The situation is changing.”

Companies that rely on China as part of it supply chain do not have a clear line of sight on when the country will be back to business as usual. And Foot Locker no longer issues quarterly guidance. This means analysts can only look at Foot Locker’s 12-month forecast which may not accurately reflect the short-term reality facing the stock.

Does Foot Locker have the power?

In November, I wrote that Foot Locker stock was rising after Nike announced it was no longer selling its shoes on Amazon (NASDAQ:AMZN). At the same time, Foot Locker was launching a series of Foot Locker Power Stores which were a combination of exclusive brands and digital technology. The Power Stores give local designers, artists, and influencers the opportunity to showcase their work. In some ways, it’s a scaled-down version of what Lululemon (NASDAQ:LULU) is doing by creating full-service stores that include yoga studios and health-food restaurants.

If the model works it can certainly boost sales. But if the earnings report is any indication, the early returns are not what the company would have hoped. However, Foot Locker has made significant investments in its digital marketing and e-commerce efforts. And the brand continues to sport a solid balance sheet.

Should you buy Foot Locker stock?

Analysts still like Foot Locker stock. They have set a 12-month price target of over $48 per share for FL stock. That would be an upside of nearly 35% from its current price. They also have a consensus buy rating for the stock.

I’m not as concerned about the impact of the coronavirus on the stock. The reality is if Nike or Adidas has a problem shipping product it affects the industry as a whole. And athletic shoes are still wildly popular with younger consumers.

The question that hangs over the stock is what happens if this market correction deepens and begins to seriously impact consumer spending? Will consumers not only stop visiting stores (which still makes up a large part of Foot Locker’s sales)? Or will they stop buying the shoes altogether? Or at the very least will they buy the value brands instead of the higher-priced new editions?

It’s one thing to say that “kids will always buy shoes”. But statements like those tend to be true until they aren’t. Foot Locker does offer a dividend so if you want to buy some shares for that, you could. The company has increased its dividend by an average of 9.91% annually over the last three years. And has nine consecutive years of rising dividends.

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