In a scenario where Foot Locker begins to struggle, it could make sense for Nike to buy the company, Citi says
Shares of Foot Locker (FL) rallied on Friday morning after an analyst from Citi said the stock is a good way to play the economic recovery in fiscal 2021. The analyst contended that in the unlikely scenario Foot Locker begins to struggle, it could make sense for Nike (NKE) to buy the footwear and athletic apparel retailer.
CHEAP NAME: Citi analyst Paul Lejuez upgraded Foot Locker to Buy from Neutral with a price target of $60, up from $47. The analyst believes Foot Locker is a good way to play the economic recovery in fiscal 2021 as a "cheap name within the athletic footwear market." While Foot Locker's sales have benefited from stimulus and pandemic purchases in fiscal 2020, sales were promotionally driven, making for easy margin comparisons in fiscal 2021 as inventory levels exit 2020 in good shape, Lejuez told investors in a research note.
Longer-term, Lejuez contended that Foot Locker's strategic investment in GOAT will help them participate in a growing third party sneaker market and its investment may be getting overlooked in its current valuation, making shares even cheaper than they look. Excluding GOAT, the analyst noted that Foot Locker's core business is trading at just an FY21 EV/EBITDA multiple of 3.6 times, making the risk/reward attractive at current levels.
'MANY REASONS' WHY NIKE SHOULD BUY: In a separate note, Lejuez told investors that while most brands need to focus on their own digital and store assets to grow their direct-to-consumer business, Nike has another option: Combining with Foot Locker. Nike products represent 70% of Foot Locker sales, and there are "many reasons" a combination of the two businesses makes financial and strategic sense in the current environment, the analyst argued. He noted that if Nike paid $67 per share for Foot Locker, a 50% premium to the current price, it would represent a $6B enterprise value, or less than 3% of Nike's market cap, Based on his assumptions, an acquisition of Foot Locker would be 30c accretive to Nike's earnings per share. Lejuez believes Foot Locker is worth more to Nike than Foot Locker is worth on its own.
While the analyst believes Foot Locker is in "sound" financial shape, in the unlikely scenario that it really starts to struggle, Lejuez thinks it would make sense for Nike to own Foot Locker outright rather than let it falter.
PRICE ACTION: Foot Locker shares gained 2.3% to $49.09 in late morning trading. Meanwhile, Nike rose almost 2% to $143.21.