Foot Locker (FL -0.04%) stock was a surprising winner this week. The sneaker and athletic apparel retailer was seen as a beneficiary of a shift in Nike‘s (NKE -0.16%) strategy as the footwear giant indicated in its earnings report last week.
Foot Locker also gained on an analyst upgrade to start the week and the perception that the stock could be undervalued after it plunged on its earnings report earlier in the month. Foot Locker finished the week up 16.9%, according to data from S&P Global Market Intelligence.
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Nike’s strategy shift back in Foot Locker’s favor
It’s no exaggeration to say that Foot Locker is highly dependent on Nike. In 2022, about 65% of its product came from Nike, and the company said in its annual report, “Each of our banners are highly dependent on Nike.”
In recent years, Nike has moved away from the wholesale channel and instead leaned on direct-to-consumer sales through the digital channel and its own stores. However, with its sales growth, Nike is rethinking that decision and seems to recognize the value of wholesale partners like Foot Locker.
On the earnings call, Nike CEO John Donahoe said, “We must lean in with our wholesale partners to elevate our brand and grow the total marketplace.” He also said the company would increase its investment in the wholesale channel.
That move will favor Foot Locker. The two companies have historically had a close relationship with Foot Locker getting access to exclusive launches, and Nike seems prepared to lean on that again.
Additionally, Foot Locker jumped on Monday after Evercore ISI raised its rating to outperform and lifted its price target from $28 to $32. Analyst Michael Binetti said that channel checks indicated there will be “the most significant investment behind the specialty athletic retail channel that we’ve seen in years.”
That followed an upgrade from Citigroup last Friday.
Is Foot Locker a buy?
Foot Locker’s own fourth-quarter earnings report indicates the company could use some help. The company reported adjusted earnings per share of just $0.38 in the seasonally strong fourth quarter, and comparable sales fell 0.7%. It does expect a return to comparable sales growth this year.
It’s unclear what Nike’s plans are, but any shift toward the wholesale channel is likely to benefit Foot Locker. If it can return to its earlier profitability levels, the stock could have a lot of upside.
Citigroup is an advertising partner of The Ascent, a Motley Fool company. Jeremy Bowman has positions in Nike. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends Foot Locker and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
