On Monday, UBS made a notable adjustment to its stance on Foot Locker (NYSE:FL), shifting the athletic footwear and apparel retailer's stock rating from "Sell" to "Neutral." Accompanying this change, the firm also significantly increased Foot Locker's price target from $12.00 to $23.00.
The revision of the rating is attributed to a few key factors. Firstly, the anticipated decline in earnings per share (EPS) for the fiscal year 2024 has largely materialized, with sell-side forecasts adjusting from an initial $4.50 to the current $1.60.
This adjustment indicates a reduced risk of further downward revisions to EPS estimates. Secondly, the firm's outlook on the macroeconomic environment and the market has shifted from bearish to a more neutral stance, leading to the application of a higher price-to-earnings (P/E) ratio of 10x for valuing Foot Locker's shares, up from the previous 6x.
Additionally, the relationship between Foot Locker and Nike (NYSE:NKE), previously seen as a negative due to competitive pressures, may not adversely affect Foot Locker over the next twelve months (NTM). There is a possibility that Nike's strategy could evolve to drive sales through Foot Locker to meet market expectations.
Lastly, Foot Locker's investments in technology, digital capabilities, and brand building are expected to potentially enhance sales and margins over the NTM. Although these investments have impacted near-term earnings, they are considered necessary and could be beneficial in the long term.
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