Why Merrill Lynch Loves Nike, Under Armour and Footwear Retail Stocks

Foot Locker

This athletic shoe retailer had a very solid holiday selling season. Foot Locker Inc. (NYSE: FL) operates 3,419 stores in 23 countries in North America, Europe, Australia and New Zealand, under banners such as Foot Locker, Footaction, Lady Foot Locker, Kids Foot Locker, Champs Sports, SIX:02, Runners Point and Sidestep.

Many Wall Street analysts feel that consumers are bearing price increases from the top companies like Nike and Under Armour. They also say that currently athletic apparel and footwear companies are continuing to see higher gross margins and return-on-invested-capital, which they think is a source of multiple expansion. That should be just the ticket to get a further lift in the stock price. In its third-quarter earnings report, Foot Locker noted that comparable sales jumped 8.7%, beating nearly every other retailer.

Foot Locker investors receive a 1.56% dividend. Merrill Lynch has a $74price target, but the consensus estimate is $76.17. The stock closed Thursday at $64.56.

Finish Line

Finish Line Inc. (NASDAQ: FINL) is a premium retailer of athletic shoes, apparel and accessories. Headquartered in Indianapolis, Finish Line has approximately 1,010 Finish Line branded locations primarily in U.S. malls and shops inside Macy’s department stores, and it employs more than 14,000 sneaker-ologists who help customers every day connect with their sport, their life and their style.

Finish Line also operates the Running Specialty Group. This includes 73 specialty running stores in 16 states and the District of Columbia under the JackRabbit, The Running Company, Run On!, Blue Mile, Boulder Running Company, Roncker’s Running Spot, Running Fit, VA Runner, Capital RunWalk, Richmond Road Runner, Garry Gribble’s Running Sports, Run Colorado, Raleigh Running Outfitters, Striders and Indiana Running Company banners.

After reporting a third-quarter loss, the company announced the closing over the next four years of up to 150 stores, or around one-quarter of its total. CEO Glenn Lyon is to step down from his position effective February 28, to be replaced by current president Sam Sato. This is a similar tact that Foot Locker took and it makes good sense.

Finish Line shareholders receive 2.0% dividend. The Merrill Lynch price target is posted at $22. The consensus target is $20.58. The stock closed most recently at $18.02.

The great thing for investors is athletic wear and shoes never go out of style, and the demand is always consistent. Also, the demographics for purchasers are almost as wide as any product available. Anybody from ages seven to 70 can use a new pair of athletic footwear or clothing, and that won’t change anytime soon.