Foot Locker Stock Could Drive 40% Rally

Foot Locker Stock
Credits:iStock.com/denphumi

Hold Off on the Funeral for Foot Locker

We all know how the brick-and-mortar retail segment is getting slammed by the rapid emergence of online retailers, and it could worsen. Yet, while the majority of these retailers face a daunting task to regain market share, there are aggressive opportunities for stock traders, including that of Foot Locker, Inc. (NYSE:FL).

I’m pretty sure the majority of you have ventured into one of Foot Locker’s vast network of about 3,363 retail stores in the United States, Canada, Europe, Australia, and New Zealand.

Foot Locker is currently the biggest sporting footwear and apparel retailer in the world but is facing hard times with the uprising of Amazon.com, Inc. (NASDAQ:AMZN), which is single-handedly killing the brick-and-mortar retail space.

Now, while FL stock is still fully functional at this time, the company will need to find ways to fend off Amazon or risk a similar fate as the one that doomed Sports Authority, Inc.

In March 2016, Sports Authority filed for Chapter 11 protection; by the end of May of that same year, the company was liquidated. This should be a warning for Foot Locker.

Foot Locker stock is trading at around $47.00, which is well below its 52-week (and record) high of $79.43 on December 8, 2016. FL stock is down 38% over the past three months, and is trying to find support.

It will not be an easy road ahead for Foot Locker with Amazon in the way, but there is hope the premier athletic retailer can grow its online capabilities and hold off Amazon.

The current underlying fundamentals are decent and should allow time for Foot Locker to figure out things.

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Revenues and earnings have risen in two straight fiscal years and the positive trend is expected to continue, albeit at a somewhat muted rate.

Foot Locker is slated to increase revenues by 4.3% and 2.6% in FY18 and FY19, respectively. (Source: “Foot Locker Analysts Estimates,” Yahoo! Finance, last accessed July 20, 2017.)

On the surface, FL stock looks like a value play, trading at around 8.65 times its FY19 earnings per share (EPS), and having a price/earnings to growth (PEG) ratio of 1.25. But be careful, as the stock could very well be a value trap if it cannot defend itself against Amazon.

Technical Picture Not Pretty for FL Stock, But There Is Hope

Foot Locker stock had three attempts to break above $80.00—in July 2016, December 2016, and May 2017—but it failed in each situation.

fl1

Chart courtesy of StockCharts.com

The bearish multiple top formations subsequently led FL stock to plummet from around $75.00 to below $60.00 in one session. Right after the collapse, FL stock displayed a bearish death cross that drove the stock down to the $44.00 level, where it is currently trying to hold.

For traders, the downside risk for Foot Locker stock is $40.00 with a worst case scenario being the $30.00 level last encountered in 2012 and 2013.

That’s the bad news. The good news is that Foot Locker could survive the fate of Sports Authority and recover, assuming the economy grows and people spend.

The decent fundamentals, and the fact that Foot Locker continues to increase its dividend by at least 10% annually, should help add support and prop up the stock.

FL price chart

Chart courtesy of StockCharts.com

If everything pans out for Foot Locker stock, the Fibonacci Retracement levels indicate FL stock could rally back to $57.50, $61.50, and $66.00.