Here's the best way to play the 'rise of sneaker culture' (FL, NKE)

pulse

March 2, 2018 8:16 PM

Betting on Foot Locker could be the best way to play a stronger sneaker cycle, a Jefferies analyst writes.

Shares of the shoe retailer dropped 13.84% on Friday after it reported disappointing quarterly earnings.

Though Foot Locker has disappointed Wall Street with less-than-stellar earnings this quarter, a Jefferies analyst seems to think the company will get a big performance boost from the "rise in sneaker culture."

Sneakers have become in vogue again, especially among the lower income demographic, Jefferies analyst Randal Konik wrote in a note to clients. Foot Locker has seen a sizable number of cash transactions, which he said is common among the low income group. He believes that renewed interest will only continue to grow with improving employment and wage trends.

"[Foot Locker] remains our favorite way to play a strong footwear cycle," Konik said in a note. "We continue to see FL as a prime beneficiary of the strong athletic footwear cycle and rise of sneaker culture, given its dominant position in the category."

Konik says this position has been solidified by the rise in popularity of Nike.

Though Nike has had its own share of struggles while looking to gain an edge over its rivals, Foot Locker will be part of its strategy to curb its wholesale distribution in order to focus on key accounts, of which Foot Locker is one. This will potentially give the shoe retailer better access to the best Nike products, Konik said.

Already, Nike's VaporMax, VaporMax Plus, Air Max 270 and the Epic React, as well as its Jordan business, have all been popular with Foot Locker customers. Yet Foot Locker has hinted that it expects to receive better products from major brands in the near future.

Richard Johnson, Foot Locker's chairman and CEO, said in an earnings call that he sees the point of inflection for the company owing to the "depth around some of those products that are just starting to launch now or are just making their way into the marketplace now."

He added that he hopes to work with vendors like Nike and rival Adidas to increase the pace at which athletic footwear and apparel are brought to the market. "Our industry still does move too slow," he said.

Indeed, Nike has been criticized for moving slowly on trends, but its consistent release of new styles and colors for its popular VaporMax and VaporMax Plus has precipitated the sneaker company's own comeback.

And Nike's inflection should eventually rub off on the shoe retailer. After all, Nike represents 70% of Foot Locker's total products, Konik added.

The analyst believes Foot Locker's valuation is too low, which makes it an attractive buy. His price target for the company is $55, which is 38% above its current share price.

Foot Locker's stock was trading at $39.51 a share, and was down 17.46% for the year.

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