Needham analyst Tom Nikic initiated coverage on Foot Locker, Inc. (NYSE:FL) with a Buy rating and a price forecast of $27.

The analyst writes that Foot Locker is positioned for an earnings recovery in 2025, with improvements expected from a strengthened Nike, Inc partnership, growth in non-Nike brands, recent SG&A investments, and the recovery of merchandise margins.

Despite a current lull post-back-to-school, the analyst expects trends to pick up after Thanksgiving and is encouraged by a recent consumer survey indicating strong holiday interest in sneakers.

Nikic notes that Foot Locker faced challenges due to Nike's decision to reduce high-demand product supply but believes Nike's shift to increase product allocations to Foot Locker starting in the fourth-quarter of 2024 will drive positive sales growth.

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Additionally, Foot Locker is benefiting from expanding Hoka and On availability, along with strengthened relationships with brands like Adidas AG, New Balance, Crocs, Inc., and UGG.

The analyst explains that Foot Locker's EBIT margin was significantly lower last year compared to pre-COVID levels and is only expected to see modest improvement in FY24 due to aggressive long-term growth investments.

However, as spending tapers off next year, Foot Locker is expected to leverage these investments to expand margins.

Additionally, with merchandise margins still over 300bps below pre-COVID levels, there is further opportunity for gross margin improvement, Nikic adds.

The analyst projects the company to report FY24 revenues of $8.164 billion and earnings per share of $1.61.

Price Action: FL stock is up 1.67% at $22.83 at last check Friday.

Photo by Sorbis via Shutterstock

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