Cool Shoes: Here's Why Foot Locker Is Still A Shoe-In For Investors

On Friday, shares of Foot Locker appeared to go haywire after the company’s second-quarter 2018 earnings report. Despite beating on earnings and revenue, shares were noticeably down, as it appeared investors were looking to let the company's other shoe drop. But analysts remained squarely on team Foot Locker, and for the most part, have encouraged investors to stay the course.

During the call, Foot Locker EVP and CFO Lauren Peters said that footwear posted a “slight comp decline with average selling prices up, while units were down,” something that could have put investors on edge. Even so, Peters continued:

“Apparel had another strong performance, up double digits, its eighth consecutive quarter of positive comp sales. Both ASPs and units were up in apparel, reflecting our customers’ strong appetite for our more premium, branded assortment. Lastly, accessories were down double digits, as strong demand for bags was offset by sales declines in hats and socks.”

That aside, here are a few of the company's positives: despite the closure of over 100 stores, Foot Locker remains on track to open 45 new stores this year. While pressure to perform is very real and it remains a challenge across the retail landscape, Foot Locker is making purposeful moves and taking a page from other retailers by rolling out mini hubs to provide next day delivery in 6,000 zip codes.

Meanwhile, the company's plans to open power stores in the UK and to expand into Singapore, Hong Kong and Malaysia has impressed analysts, including Neil Saunders of GlobalData. In an update, Saunders wrote that while it has its challenges ahead of it, Foot Locker is still a contender:

“We are also encouraged by some of the developments, such as the push into Asian markets via e-commerce. These should help provide the company with new streams of growth. We also applaud Foot Locker for keeping its eye on smaller opportunities during its time of change. The modest investment in Carbon38, a luxury active apparel company, is a good example of building a foundation for future ventures.

Overall, we think Foot Locker will regain some ground as it moves into its fiscal - if only because prior year comparatives become incredibly soft. However, given the unfortunate dynamics in the market, it will need to run much faster just to stand still.”

Cristina Fernandez and team of Telsey Advisory Group acknowledged a rough basketball footwear season, but called the stock’s decline “an overreaction” given Foot Locker’s strengths, which include demand for “new Nike product and retro brands such as Champion, FILA, and Vans."

“While the Jordan brand is expected to remain soft in third-quarter 2018, it should start to improve in fourth-quarter 2018 as lower allocations are lapped,” wrote the team. “In addition, inventories remain clean at the company and within the industry, helping to drive more full-price selling and a higher gross margin.”

And finally, Paul Trussell and team at Deutsche Bank agreed that the sell-off was an overreaction and outlined some of the positives, and concurred that Foot Locker has a lot of work to do:

“We think today's sell-off is overdone due to the following: 1) a return to positive comps with sequential improvement expected through the second half; 2) improved traffic (flat in the US vs. down low-single digits in the first quarter); 3) better trends in Europe (down low-single digits vs. down low-double digits in the first quarter); 4) increased breadth and depth in trending footwear styles; 5) the expectation for Jordan Retro headwinds to abate in the fourth quarter; and 6) improved product margins due to lower promotional activity in the US.”

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