Canaccord Genuity raised its rating on Foot Locker to “Buy” from “Hold” due to signs of improving footwear trends, the benefits of its supply chain enhancements and its “strong and symbiotic” relationship with Nike.

Camilo Lyon, the lead analyst, wrote that the recent weakness in same-stores at Foot Locker is being driven by product and is cyclical rather than structural in nature. With inventories expected to be in better shape early next year, the second quarter of 2018 has the potential to start showing margin improvement.

Lyon wrote, “FL is approaching the end of the inventory clearance cycle it has been in for the past three quarters, driven by soft Nike/Jordan platforms, tough Adidas Superstar/Stan Smith comparisons, and insufficient quantities of new, strong-selling platforms like VaporMax and Boost.”

Lyon believes footwear trends are improving sequentially with strength in running styles from both Adidas and Nike, sequential gains in basketball and a moderation in the declines recently seen in Signature basketball product. The Jordan brand is also expected to benefit from a “greater design and distribution segmentation focus,” and kids footwear is seeing improvement with the arrival of newer takedown models.

Lyon added, “More importantly, footwear trends should accelerate materially going into next year, especially as a greater mix of Nike’s innovation pipeline enters the market over the next 6-12 months.”

On the backend, efforts to partner with key vendors on shortening lead times as well as its own internal efforts, such as the opening of mini-hubs concept in key major metropolitan areas to store inventory, should help both improve in-store stock replenishment and support next-day or same-day delivery for DTC orders.

Lyon said the ability of vendors to “speed up product deliveries and shorten lead times will also help accommodate rapidly shifting brand preferences by FL’s digitally-driven consumer.”

Canaccord Genuity lifted its price target on Foot Locker to $64 from $42 previously.

Photo courtesy Foot Locker