Foot Locker shares bounce 9% on a positive Wall Street note — we remain guarded

Published Thu, Dec 14 20232:46 PM EST

Shares of Foot Locker were up more than 9% Thursday following a Wall Street upgrade and report that named the sneaker seller the best turnaround play in retail. We like the call but need to see more progress. Analysts at Piper Sandler bumped their rating on FL shares to a buy from a hold, arguing that 2024 looks like a big rebound year for the long-struggling company. They point out Foot Locker's margin expansion opportunity — more than 180 basis points — as inventory continues to move to healthier levels. This should amount to a more favorable mix of product and full-price sales following all the heavy discounting in 2023 to work through excess inventory. That flush out has been a serious drag on margins in 2022 and 2023. The positive view comes on the heels of the Foot Locker's better-than-feared quarterly earnings report in November. We pointed out then that better-than-feared is sometimes all you need for a stock to rally in a market that has been focused on only a handful of mega-cap names for nearly a year. But we aren't changing our 4 rating just yet. As noted during the Morning Meeting , we clearly got into FL too early, when the company wasn't far enough along in the inventory correction process. However, if the facts are starting to change, we can't be as pessimistic as we were prior to the third-quarter release. Piper Sandler further argued that Foot Locker stands to benefit from the broader shift in the market, as investors start to look at a rotation from the winners in retail to those that have struggled but are begining to turn around. To determine which turnaround stands to perform best in the next 6 to 12 months, the analysts considered several metrics including leverage, consensus expectations, inventory management, valuation, cost savings initiatives, and key management changes. It's a view we share. We have pointed out that investors are starting to move away from best-in-class names in search of second- and third-tier names with bigger upside. We are certainly seeing that in today's market action. The view: These stocks have been under so much pressure in 2023 that they don't need to be great in 2024 for the stocks to move higher. They just need to be not as bad as this year's price action would have you believe. In other words, investors aren't looking for A students, their looking for the C students that can prove to be B or A students in time. Another trend in Foot Locker's favor, they said, was that the lower-income consumer — an important cohort for Foot Locker — may be beginning to recover from dual headwinds of higher prices and lower stimulus. There are even some signs of deflation (meaning lower prices) in the apparel category. Though visibility on the return to growth for Nike (NKE) remains cloudy, the analysts believe volatility around sales of the brand will prove manageable. The expansion of non-Nike brands should serve to mitigate or even more than offset headwinds resulting from management's efforts to reduce reliance on Nike. We still need to see some follow-through in the all-important holiday fourth quarter, where comments regarding inventory levels, foot traffic and promotional activity levels will be crucial to determining if we need to get more bullish on the name in 2024 or if we need to consider moving on. Put simply, it's a make-or-break quarter for Foot Locker, as we look for tangible progress on management's Lace Up turnaround strategy. (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.

Shoppers stand in line to enter a Foot Locker Inc. store at the Queens Center shopping mall in the Queens borough of New York, U.S., on Wednesday, Sept. 9, 2020.

Peter Foley | Bloomberg | Getty Images