Retail
Why Merrill Lynch Raised Both Foot Locker and Finish Line
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Foot Locker Inc. (NYSE: FL) and Finish Line Inc. (NASDAQ: FINL) have made their names as some of the most prominent athletic footwear retailers. Both were riding high in Tuesday’s session on upgrades from one key analyst.
Merrill Lynch upgraded Foot Locker to a Neutral rating from Underperform and raised the price objective to $70 from $60. The firm now believes Foot Locker could sustain a MSD same-store sales trend into the fiscal 2017 year on strong momentum in casual athletic footwear. While Foot Locker’s EBIT margins are at all-time high levels, Merrill Lynch believes the company will leverage occupancy if comps continue to rise.
Following years of underpenetration in the mall channel, Under Armour Inc. (NYSE: UA) is emerging as a strong footwear brand, considering the Steph Curry sneaker and Speedform running platform, which Merrill Lynch believes is a new merchandising opportunity for Foot Locker. The firm estimates Under Armour is only in 30% to 40% of Foot Locker stores today.
Shares of Foot Locker were trading up 2.8% at $65.81 Tuesday, with a consensus analyst price target of $75.57 and a 52-week trading range of $51.12 to $77.25.
Merrill Lynch also upgraded Finish Line to a Buy rating from Underperform and raised the price objective to $22 from $19. The firm believes improving casual athletic allocations from Nike Inc. (NYSE: NKE) will support same-store sales. Gross margin pressure should subside as Finish Line laps clearance of excess inventory from last year.
Merrill Lynch believes Finish Line could return to growth in fiscal 2017 and expects that casual athletic assortment will improve, Under Armour’s penetration will increase and product margins will expand against easy comparisons. Current valuation appears to be pricing in a decline in earnings next year, and Merrill Lynch believes that could be an attractive entry point.
More importantly, the firm believes the emergence of Under Armour in the mall channel will encourage Nike to maintain focus on mall retailers in defense of its dominant market share position, which supports the continuation of favorable Nike sneaker allocations to both Foot Locker and Finish Line. While the strength of Finish Line’s casual athletic footwear assortment has lagged Foot Locker’s, the analysts believe allocations began to improve meaningfully in December, including deeper assortments of Roshe, Huarache, Jordan Eclipse, Cortez and Air Force Ones.
Finish Line shares were trading up 6.3% at $17.80. The consensus price target is $24.31, and the 52-week range is $15.37 to $29.05.
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