Foot Locker's stock tripped up by Citi's call to sell

By Tomi Kilgore

Citi's downgrade comes two days before Foot Locker reports earnings, which are expected to come with another lowered profit outlook

Shares of Foot Locker Inc. fell Friday after Citi analyst Paul Lejuez turned bearish two days before earnings are due and as investors appear to have gotten carried away, considering that the holiday selling season is expected to be pretty challenging for the athletic-shoe seller.

Lejuez cut his rating on the stock to sell from neutral, saying a weakening economic outlook and "still-elevated" inventory levels will lead to more discounting than planned during the holidays. That makes him one of five of the 21 analysts surveyed by FactSet who are bearish on the stock.

He kept his price target on the stock (FL) at $18, which implies about 22% downside from current levels.

The shares shed 1.5% in morning trading to pull back from Friday's three-month closing high of $23.32. While they have soared 38% since closing at a 13-year low of $16.64 on Aug. 23, they have still plunged 39.2% year to date, while the SPDR S&P Retail exchange-traded fund XRT has gained 5.3% and the S&P 500 SPX has rallied 18.6%.

"We believe [Foot Locker] will sacrifice margin near-term to get clean on inventory by year-end," Lejuez wrote in a note to clients.

The more Foot Locker discounts, the less the company makes on each shoe, which drives down gross margins.

And with approximately 64% of Foot Locker's sales coming from Nike Inc. (NKE) products, the company "is not completely in control of its down destiny," Lejuez wrote.

On Black Friday, Wedbush analyst Tom Nikic said that while overall, consumers appear "fairly resilient," Foot Locker is "unusually promotional," including a weekend step-up in discounting.

"Historically, [Foot Locker] has not been a very promotional retailer even during the holidays, using 'high heat' products to drive traffic rather than discounts," Nikic wrote in a research note. "However, they began promoting more heavily last Black Friday, and the discounting accelerated further this year."

Foot Locker is expected to report fiscal third-quarter results on Wednesday. The company has missed profit, total sales and same-store sales expectations the past two quarters, while the stock has plunged an average 27.8% on the day those results were reported, according to FactSet data. Same-store sales are sales from stores open at least a year.

Citi's Lejuez cut his estimate for third-quarter earnings per share to 10 cents from 26 cents, compared with the FactSet EPS consensus of 22 cents. He projects an 11% drop in same-store sales, compared with the FactSet consensus for a 9.7% decline.

He expects Foot Locker's management will again lower the full-year EPS guidance range to about $1. The outlook was cut three months ago to $1.30-$1.50, from guidance of $2.00-$2.25 provided in May and of $3.35-$3.65 provided in March.

The company expects fiscal 2023 same-store sales to be down 9% to 10%.

"With lower allocation of [Nike] product this year and a weakening macro, we see [same-store sales] coming in at the low-end of their current guidance range and margins weaker than anticipated (assuming [Foot Locker] has to get more promotional than planned to clear through excess inventory)," Lejuez wrote.

-Tomi Kilgore

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11-27-23 1057ET

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