Foot Locker: the next chapter begins with an uber-bullish upgrade

Key Points

• Shares of Foot Locker are rallying hard from multi-year lows. 
• Better-than-expected results and a fresh upgrade are driving shares up close to 100%. 
• Risks remain, however, and not everyone is on their side.

Few stocks have mimicked a rollercoaster over the years as that of Foot Locker Inc NYSE: FL. With a chart made up of seemingly non-stop triple-digit rallies and double-digit drops, it's perhaps no surprise that, once again, Foot Locker shares are hitting the headlines. And this time, it's for the right reasons. 

It had been looking like 2023 was going to be a year to forget for the New York-headquartered footwear and apparel company. A 70% drop though August had shares trading at their lowest levels since 2010, but, just like multiple times in the past, the Foot Locker bears seemingly ran out of steam overnight, and the bulls took control. 

The stock is up 100% since then and is set to deliver more gains. At least so says the team from Piper Sandler, who upgraded their rating on the stock last week from Neutral to Overweight. Much of their optimism stemmed from the company's Q3 results, released at the end of last month. 

Strong results

With Foot Locker shares already having rallied hard since August, a strong result was needed to justify the gains, and the company didn't disappoint. The report topped analyst expectations for both headline numbers and was a fitting result for what the company had been calling its "reset year." 

The team at Piper Sandler was particularly impressed with the company's margin expansion, something that needs to be maintained if the recovery is to continue into 2024. The blossoming signs that inflation is continuing to cool have them bullish on this being the case, as lower interest rates will lead to a financial recovery and additional spending among lower-income groups. 

In a similar vein, certain market segments, particularly apparel, are starting to see deflationary trends emerge. This shift is significant as it plays a key role in enhancing the purchasing power of Foot Locker's primary customer base, providing them with more disposable income for retail spending.

On the back of these tailwinds, Piper Sandler upped its price target on Foot Locker shares to $33. From where shares closed on Monday, this points to an additional upside of at least 10%, and were shares to hit this in the coming sessions, they'd be at their highest level since May. They'd also have completely closed the gap down from that same month, which did so much damage, and so technically, they would be well positioned to rally through the end of the year. 

Fundamental tailwinds

Further fundamental tailwinds are coming from a bullish industry-wide inventory landscape heading into 2024. This improvement is expected to benefit Foot Locker significantly, as the company is set to refresh its product assortment, capitalizing on the opportunity to offer consumers the latest and most sought-after products and brands.

It's likely that this was one of the reasons the company boosted its full-year same-store forward guidance in last month's report, a move that has obviously done wonders for the stock and given investors a fresh boost of confidence. 

It will be interesting to see if Piper Sandler's confidence is echoed by their peers across the analyst industry. While the past few weeks have been good for Foot Locker, there's no getting away from the fact that they have a long road ahead of them, and not everyone is on their side. It was only two weeks ago that the Goldman Sachs team reiterated their Sell rating on the stock, while the Citi team downgraded their rating from Neutral to Sell. 

However, Foot Locker shares were looking set to open up again on Tuesday, so for now, at least, it looks like the bulls are still in control. Getting involved will require an iron stomach, certainly, at least until they've delivered another couple of strong reports. One thing is for sure, though, this rollercoaster ride ain't about to end anytime soon.