UBS says investors should sell this footwear retailer as it will struggle in a recession
Source
UBS is bearish on Foot Locker , saying that the shoe retailer is unlikely to drive revenue growth in a recession. Analyst Jay Sole downgraded the stock to sell from neutral and cut his price target to $30 from $36. The new target implies downside of 25% from Tuesday's close. Sole said he does not believe "enough bad news is priced in" for Foot Locker and several other softline stocks. "Our conversations with investors suggest the market is too focused on potential margin recapture and not focused enough on downside risks to sales. To many, a recession significantly weighing on softgood sales is still a bear case. For us, it is a base case," Sole said. "We think FL faces structural challenges due to increasing competition from strong athletic brands like Nike. Over the last few years, FL has closed its Footaction, Eastbay, Runner's Point, Sidestep, Lady Foot Locker, and its Asia business. Plus, its Champs business is set to close many of its stores. We expect the trend to continue as market share continues to shift to brands," he added. UBS said Foot Locker also faces more challenges to growth as Nike — which currently accounts for 70% of Foot Locker's sales — grows its direct-to-consumer businesses. "Nike as a percentage of FL's sales is on track to decline to 55-60% from 70% over the course of the next 12-18 months, in our view. We doubt Nike Inc. will ever make up 70% of sales again for FL. In fact, we believe the percentage will fall further from 55-60%," Sole said. "Our view is Nike's main strategic priority is to grow its direct-to-consumer (DTC) business and this comes in direct conflict with its relationship with FL. We think Nike will be successful [in] increasing its DTC business and as a result will have new motivation to reduce its inventory allocation to FL." Sole added that "we think Nike is establishing deeper ties with some of FL's competitors and this will make it even harder for FL to grow with Nike over the long-term. We don't believe other brands will be able to drive enough traffic to make up for the reduced Nike allocation." UBS' downgrade comes after Foot Locker issued a mixed fourth-quarter report. The company posted earnings and revenue that beat analyst expectations. However, its full-year earnings guidance was well below analyst estimates. Foot Locker shares were down 2.6% during premarket trading on Wednesday. Shares of the retailer have jumped almost 6% in 2023 and 27% during the past 12 months. FL 1D mountain Foot Locker stock —CNBC's Michael Bloom contributed to this report.