FL: Hedgeye's Process Unleashed

Despite Keith’s selling of FL in the firm’s virtual portfolio, we remain confident in the intermediate-term opportunities for Foot Locker shares. 

By now, many of our subscribers are aware of our unique process at Hedgeye that marries Keith’s macro and quantitative views with our company-focused fundamental perspective.  Often times our best ideas are born out of the intersection of the two processes.  At other times, there can be a disconnect between us, resulting in opposing opinions.  While Keith’s move here is primarily predicated on his broader view of the market, we want to reiterate that our fundamental view on Foot Locker shares and the company’s turnaround efforts remain unchanged.  We still believe this represents one of the better stories in retail, driven by both strong athletic footwear and apparel tailwinds as well as strategic initiatives put in place by CEO, Ken Hicks and his team.

A second pillar of our process is transparency, which means we’re more than happy and in fact, proud to share our thought process with you in real time.  As such, here’s Keith’s perspective on why he sold his position in FL this morning:

“Stock between a rock and a hard place plus I am bearish on the market… market call with a stock that just broke its TREND line of 14.49 and hasn’t been able to recover it … long term TAIL of support all the way down to $11.81, so I have time to buy it back on any market weakness” - KM

Importantly, Keith’s selling of the FL position in the firm’s virtual portfolio does not change our key view on the opportunity for the shares, which we highlight below:

We continue to believe the COMBINATION of Foot Locker specific drivers such as improved apparel assortments, distinct banner segmentation, and inventory management will ultimately lead to a continued string of upside over the next several quarters.  Importantly, the company’s recent 1Q results were the first reported since Ken Hicks unveiled the company’s strategic plan on March 9th.  We remain confident that management is conservative with its forecast on both the top and bottom lines, preferring to use a still “uncertain economic” backdrop as a reason for which to be reserved. 

While management may be conservative, we remain aggressive both on the opportunity to see meaningful earnings upside over the next couple of years as well as the commensurate opportunity for share price appreciation.  Our estimates remain comfortably ahead of the Street for this year at $1.05 vs. $0.87.  We’d continue to use the market weakness and jitters to revisit the intermediate term opportunity.  As stated above, we suspect Keith will also be revisiting at some point as well.  

Eric Levine

Director