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Why Foot Locker Stock Can Run Higher

5 min read

This story originally appeared on MarketBeat

Up almost 35% year-to-date, Foot Locker (NYSE: FL) is one of the top-performing retail stocks of 2021. The run may be just getting started.

A surging digital business and solid inventory practices have the New York-based company on course for sustainable growth as the global economic rebound unfolds.

After a remarkable 14-month winning streak, Foot Locker stock has slipped since climbing as high as $66.71 in May 2021. Now 18% off its post-COVID peak and with the company set to report second-quarter earnings next week, investors have a great opportunity to step foot in one of the biggest retail turnaround stories

What is Driving the Recovery at Foot Locker?

A decade ago, the Foot Locker name called to mind a struggling athletic brand trying to survive the slow death of the shopping mall. Today, the company is firmly on the comeback trail selling sneakers, apparel, and sports equipment through its 3,100 stores worldwide as well as through various digital channels and its Eastbay direct mail business.

Foot Locker’s first-quarter performance was an upset worthy of an ESPY award. Adjusted earnings per share (EPS) of $1.96 made the Street’s $1.09 forecast look foolish. The MVP of the period was the digital segment which posted 43% growth and accounted for one-fourth of overall sales.

Pent-up consumer demand has been evident since the economy began reopening and fitness-related companies have been among the biggest beneficiaries. And with people comfortable with spending more time at home, demand for comfy sweatpants, shorts, and tees has been especially strong.

Foot Locker is moving past the challenges related to store closures and shipping port backlogs that weighed on its ability to keep up with demand. It has emerged from the pandemic as a formidable omnichannel athletic goods retailer that is deriving growth from both its stores and its expanding online storefront.

The company’s recent success has allowed it to build up a cash hoard of nearly $1.7 billion. This gives it plenty of money to invest in opening new stores and building out its international footprint. Last week Foot Locker announced the acquisition of digital-first apparel company atmos, marking another step towards expansion in the Asia-Pacific region. It will also continue to pour funds into its fast-growing digital platforms to which modern consumers are now sprinting towards in the post-COVID world.

What Do the Technicals Say About Foot Locker Stock?

Since regaining the 50-day moving average (MA) a year ago, Foot Locker has repeatedly bounced off the near-term trend line in route to a big run. That support has shown signs of vulnerability since summer rolled around.

The stock has twice broken through the 50-day MA albeit both times in low volume. For the first time in 10 months, Foot Locker now finds itself seeking support from the longer term 200-day MA. In the last few days, it seems to have found that support, but this key trend line should be monitored going forward.

In mid-July Foot Locker moved back above the lower Bollinger band, an event that hasn’t occurred since it went on the huge rally that started in March 2020. While it would’ve been more convincing had this move been in higher volume, it nevertheless bodes well for the near term.

Is Foot Locker a Buy Ahead of Q2 Earnings?

There haven’t been any negative developments at Foot Locker since it reported Q1 results in late May. And that makes the recent pullback a rather safe entry opportunity.

On August 20th, the retailer will post Q2 results before the market open. Currently, analysts are expecting EPS of $1.06 on revenue of approximately $2.1 billion. There’s a good chance the Street hasn’t learned its lesson since last quarter’s massive beat. Look for the strength of the digital business to again drive a better-than-expected result.

History has a way of repeating itself when it comes to earnings seasonality and Foot Locker may be one of the best examples. Since shoppers tend to purchase new running shoes, golf gear, and other outdoor apparel in the late Spring/early Summer, Q2 tends to be one of the strongest periods for the company.

Flashback to Foot Locker’s 2020 Q2 earnings report which came at a time when the economy was reeling from the early stages of the pandemic. This didn’t stop Foot Locker from reporting a solid Q2 and was the market’s first clue that the retailer would do just fine amid a pivot to digital. The August 2020 report sparked a high-volume rally that ultimately sent the stock to new heights. We may see a repeat Q2 performance next week.

An inexpensive valuation is more reason to like Foot Locker here. It trades at less than 10x forward earnings compared to 16x for the apparel and shoe retail industry average. Dick’s Sporting Goods, arguably its biggest competitor, has a forward P/E of around 13x.

It wouldn’t be surprising to see Foot Locker run up ahead of next week’s earnings. So, this stock may not be in the $50’s for much longer as it gears up for the next leg of its comeback rally.

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