On Thursday, Guggenheim adjusted its stance on shares of Foot Locker (NYSE:FL), lowering the price target to $28 from the previous $34 while maintaining a Buy rating on the stock. The stock, currently trading at $22.02, has declined 13% in the past week according to InvestingPro data.
The markdown follows Foot Locker's third-quarter financial report, which revealed adjusted diluted earnings per share (EPS) of $0.33, missing estimates by $0.07. The company's comparable store sales (comps) increased by 2.4%, which was below the anticipated 2.8% increase.
The reported quarter marked the second consecutive period of positive comp growth for Foot Locker, although the momentum seen during the back-to-school season in August did not carry through September and October. Despite this, Foot Locker and Kids Foot Locker banners experienced a 2.8% rise in comps, gaining market share.
With a current ratio of 1.66, InvestingPro analysis shows the company maintains strong liquidity to support operations. Additionally, Champs Sports saw a 2.8% increase in comps for the first time since its repositioning, and WSS returned to positive comp growth with a 1.8% uptick.
Foot Locker's management pointed out ongoing macroeconomic pressures affecting consumer behavior, including more conservative shopping patterns and delays in purchases until closer to the holiday season. The company's gross margin for the quarter expanded by 230 basis points to 29.6%, although this was short of the expected 30.4%, due to more widespread promotions.
Inventory levels at Foot Locker have been decreasing for four consecutive quarters, with a 6.3% drop reported in the third quarter. The company views the current promotional pressures as temporary rather than permanent. In terms of cost savings, Foot Locker achieved $25 million in the third quarter, leading to an upward revision of the full-year 2024 cost savings estimate to $90 million from $80 million.
Despite the cautious outlook due to the third-quarter performance and a heightened promotional environment, Guggenheim anticipates a similar gross margin expansion in the fourth quarter as Foot Locker cycles past last year's higher markdowns, particularly within apparel.
Consequently, the firm has revised its EPS estimates for fiscal years 2024 and 2025 to $1.25 and $1.80, down from the previous estimates of $1.60 and $2.15, respectively.
Guggenheim's continued Buy rating is based on confidence in the transformational initiatives put forth by CEO Mary Dillon, which are expected to lay the foundation for sustainable growth in the future, targeting an 8.5%-9.0% operating margin by 2028.
Currently trading at 0.72 times book value and with analyst targets ranging from $17 to $34, InvestingPro subscribers can access additional insights through comprehensive Pro Research Reports, which provide detailed analysis of the company's valuation and growth prospects.
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