A bad downgrade from UBS provides a buying opportunity for this turnaround play

Published Wed, Mar 29 20239:49 AM EDTUpdated Wed, Mar 29 202310:29 AM EDT

Foot Locker (FL) traded lower early Wednesday after analysts at UBS downgraded their rating on it to sell from neutral and lowered their price target to $30 from $36. We would be buyers on this weakness if we were not restricted. Jim Cramer said on the Club's Morning Meeting that FL is a "strong buy." Part of call from UBS is related to a higher conviction in a consumer spending slowdown that could cause the U.S. softline retail industry's earnings outlook to deteriorate and pressure earnings. The analysts cite proprietary research data about spending intentions and the recent banking turmoil as reasons for the increased conviction in their sector call. While there remains a lot of uncertainty about the health of the consumer and it will take time to fully understand how much credit conditions tightened from what happened to the banks, our main issue with the FL sell call is that completely ignores the main points of the company's "Lace Up" turnaround strategy that was unveiled last week. One reason why UBS says Foot Locker is challenged is that it thinks Nike (NKE) as a percentage of Foot Locker sales will decline to 55% to 60% from 70% over the next 12 to 18 months. UBS doubts it will ever reach 70% again. Our problem with this is that the decline in the mix isn't purely a function of selling less Nike. Foot Locker plans to grow its non-Nike sales by more than double the company average through 2026 by leveraging brand partnerships with companies like ON Running, Hoka, New Balance, ASICS, and Crocs. Don't forget: CEO Mary Dillon formerly ran Ulta Beauty (ULTA). Her expertise is in developing brand partnerships across several different companies, and that's essential for a multi-brand retailer like Foot Locker. If there is a retail executive who can navigate the Nike partnership while building up the rest of the business, it is her. Another issue we see in the UBS downgrades is its fiscal year 2026 margin target of around 5%. This completely goes against management's target of 8.5% to 9%. Of course, this is only a target and it must be scrutinized because sometimes management teams aim high and miss. FL YTD mountain YTD performance However, Foot Locker's target has some credibility because margins will go higher as a result of the company closing 400 underperforming stores, exiting money-losing brands like Sidestep in Europe, and transitioning most of its Asia business model out of unprofitable owned stores and to a profitable licensing stream. These actions will be margin accretive over the long term. And if we needed one more reason to believe share are attractive now, we got it Tuesday after it was disclosed in a filing that CEO Mary Dillon purchased about half a million dollars' worth of shares at $39.74. Company executives may sell their stock for all kinds of reasons – they could be buying a house, it could be to pay off taxes, or it could be based on their view on the stock. But insiders buy stock for only one reason – to make money because they think the stock is going higher. Between UBS who put a sell on Foot Locker vs. CEO Mary Dillon who just bought stock, we'll side with the seasoned executive who just kicked off a turnaround plan. And with shares trading at a low 11 times forward multiple with a 4.0% dividend yield, we like the risk-reward down at these levels. (Jim Cramer's Charitable Trust is long FL. See here for a full list of the stocks.) 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.

Foot Locker exclusive Puma Transformers Trainers released on November 22nd on display on Day 3 of MCM London Comic Con 2018 at ExCel on October 28, 2018 in London, England.

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