In a note Thursday, Telsey Advisory Group downgraded shares of Foot Locker (NYSE:FL) to Market Perform from Outperform, lowering the price target to $28 from $38 per share.
Higher than expected SG&A spending in 2024 that is resulting in a more gradual pace of operating margin recovery than anticipated was cited as the reason for the rating cut.
"This higher SG&A level is a new base given normalized incentive compensation and stepped up investments in store refreshes, marketing, and technology that likely continue in 2025," wrote the firm.
"Therefore, more significant operating margin gains toward the goal of 8.5%-9.0% will require an acceleration in the company's sales growth toward 5%-6% vs. the guidance of (1%)-1% in 2024," analysts added.
Given that Foot Locker has not grown revenues at this stronger pace since 2016 (excluding 2021, driven by the pandemic boom), Telsey says skepticism is likely to remain high in the near future until there is more evidence that accelerated growth and market share gains are possible.
"Overall, given the more muted operating margin and EPS outlook for 2024, analysts are moving to the sidelines until there is more evidence that a stronger operating margin and EPS recovery can materialize in 2025 and beyond," they concluded.