Finish Line Inc (NASDAQ: FINL)'s surprising
second-quarter preliminary
earnings release resulted in some analysts
throwing in the towel, but Baird Equity Research's Jonathan Komp
is sticking with his Neutral rating. The price target has, however, been lowered from $15 to $8.
Finish Line's announcement was a "tough pill to swallow" although not entirely
surprising given weakness in other footwear retailers, Komp said. But investors should remain "reasonably confident" that the
company's brand positioning and long-term growth profile remain in place.
However, investors are also justified in wanting to see signs of sustained improvement in the company's financial performance
and execution to prove it can recover lost margins, the analyst continued. Should this be accomplished, Finish Line may return to
consistent and sustainable growth.
Meanwhile, Finish Line's balance sheet remains "reasonably healthy" and is highlighted by around $2 per share in cash and
expectations for a positive free cash flow this year, Komp added. But this may not matter for investors after the earnings
pre-announcement, as many metrics of valuation don't matter anymore. Finish Line also needs to show a comp recover after fiscal
2018 in order to remain a profitable company.
Finally, the analyst's revised price target of $8 implies a next-twelve-month P/E multiple of 13x which is below the stock's
five-year average of 14.8x. This is justified until there are clear signs of improved fundamental performance before the multiple
could be re-rated higher.
Morgan Stanley Defends Foot Locker
As expected, shares of Foot Locker, Inc. (NYSE: FL)
traded lower in reaction to Finish Line's announcement, but Morgan Stanley's Jay Sole believes Finish Line's problems are mostly structural while Foot Locker's
problems are fashion-related and fixable.
Sole maintains an Overweight rating on Foot Locker's stock although with a price target slashed from $65 to $50 as there are
three ways for the retailer to recover from its recent woes.
First, investors have reason to be concerned that Amazon.com, Inc. (NASDAQ: AMZN) could flex its muscles in the athletic footwear and apparel space and steal
share from Foot Locker, Sole commented. The fact is Amazon will take some share from Foot Locker but Amazon will mostly operate in
the mid-tier price point level which isn't Foot Locker's core category.
"Not only do we continue to believe this is the case, but we also still think Amazon fears are incorporated into the stock
price," the analyst emphasized.
Second, Nike Inc (NYSE: NKE) has several compelling
product offerings, such as Air VaporMax and Vaporfly 4%, and Hyperdunk 2017 are expected to reverse poor sales trends moving
forward.
Third, Nike and other footwear brands continue to improve the speed at which they develop products and bring them to the market
which could prove to be a "game-changer" for Foot Locker.
Finally, while there is no current reason to believe Foot Locker has any M&A deals in its pipeline, the company has
acknowledged that it is open to deals, the analyst concluded. The balance sheet boasts $1 billion in cash which presents
opportunities for the company to become "bigger and more profitable" while also receiving cash paybacks in less than two years.
At Time Of Writing
- Finish Line shares were down 17.37 percent at $8.61.
- Foot Locker shares were down 1.12 percent at $35.30.
- Nike was down 2.31 percent at $52.49.
- Amazon was relatively flat on the day, up just 0.36 percent from Tuesday's open of $940.
Related Links:
Was The
Foot Locker Sell-Off Overdone?
Foot Locker May
Not Gain Traction Until 2018
Latest Ratings for FINL
Date |
Firm |
Action |
From |
To |
Aug 2017 |
Baird |
Maintains |
|
Neutral |
Aug 2017 |
Susquehanna |
Maintains |
|
Neutral |
Aug 2017 |
FBR Capital |
Downgrades |
Buy |
Neutral |
View More Analyst Ratings for
FINL
View the Latest Analyst Ratings
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