We're initiating a position in this retailer as a turnaround play

Published Mon, Mar 27 20239:13 AM EDT

Shortly after the opening bell on Monday, we will be initiating a position in Foot Locker (FL) , buying 350 shares at roughly $38.46. Following the trade, Foot Locker will have a weighting of about 0.50% in Jim Cramer's Charitable Trust. We're calling up this sneakers and athletic wear retailer from the bullpen. As of Friday's close, shares are up about 0.5% this year, but are down roughly 18% from its high closing price of $46.59 on Feb. 2. We believe the stock can return back near that prior high as CEO Mary Dillon executes on her "Lace Up" turnaround strategy. Foot Locker shared its fourth-quarter 2022 results and held an investor day event last Monday. In Foot Locker's Investor Presentation , Dillon, the former CEO of Ulta Beauty (ULTA), made it clear that it was time to put the business on a path toward sustainable profit growth. We shared a few of the key details in our bullpen post last Friday. The five main themes: diversify its brand mix to offer more sneaker choices to become less beholden to Nike (NKE); optimize its store footprint by exiting 400 underperforming stores; wind down underperforming brands; launch new store concepts; and accelerate investments in technology and its loyalty program. We'll share more details underpinning each theme at our March Monthly Meeting on Tuesday, but here's a look at the benefits of exiting those underperforming stores. About half of the 400 Foot Locker stores the company plans to exit between now through 2026 are in C/D malls and the other half in lower-performing A/B malls. Leaving these stores will be a hit on sales to the tune of about 10%, but they are much less profitable than the rest of the chain by an average of 800 basis points. As a result, Foot Locker's total company margins will improve by about 80 basis points. Closing these doors will also allow Foot Locker to shift resources and products to higher performing off-mall and A/B locations. Foot Locker's turnaround will come at a price, or a one-time "reset" of its earnings per share. Management guided its 2023 earnings per share down 30% year over year to the range of $3.35 to $3.65. This is a big haircut to own the stock through, but the market is forward looking and as the company's growth initiatives and cost savings programs play out, it should quickly return to growth in 2024. And in the years after that, management's financial targets look very robust. In 2024 through 2026, management expects annual sales growth of 5% to 6%, with comparable sales growth of 3% to 4%, and earnings before interest and taxes (EBIT) margins reaching 8.5% to 9% by the end of 2026. For comparison, EBIT margins are expected to be 5.7% in 2023. After including share buybacks every year, Foot Locker sees its adjusted EPS growing by a low-to-mid-twenties percentage rate annually from 2024 to 2026. For a stock that currently trades at about 10.5 times the trough year (2023) earnings, this is growth at a very cheap price. We're initiating our FL position with a price target of $45 per share, about 18.5% higher than Friday's closing price, representing roughly 10.5 times the fiscal year 2024 earnings-per-share consensus estimate of $4.28. But one point to keep in mind about Foot Locker is that this is a turnaround play. Like with any turnaround, patience is required because changes don't happen overnight. It will take some time to play out. But with its below-market multiple and a hefty 4.2% dividend yield, which looks more and more attractive with the 10-Year Treasury yielding 3.46%, Foot Locker has an attractive risk-reward at these levels. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Nike sneakers sit on display at a Foot Locker store inside the South Park Mall in Strongsville, Ohio, March 4, 2014.

Luke Sharrett | Bloomberg | Getty Images