Needham starts Skechers coverage at Hold, Foot Locker at Buy

Investing.com -- Needham&Co. began coverage of Foot Locker (NYSE:FL) and Skechers USA Inc (NYSE:SKX) stocks on Friday, assigning them Buy and Hold ratings, respectively.

For Skechers, the investment firm notes that the footwear maker is facing near-term industry challenges, particularly in the China market, which has been volatile with a significant growth deceleration.

After seeing its growth peak during the fourth quarter, Skechers experienced three consecutive quarters of declining quarter-over-quarter growth, including a 6% drop in the most recent quarter.

“It appears to be more of a macro issue than a Skechers-specific one, but regardless, SKX has the largest sales exposure to China in our coverage, at 15% of consolidated revenue last year,” Needham analyst Tom Nikic said.

“So, if this market remains challenging, it will likely be a headwind for the company overall,” he added.

Skechers' gross margin, a key earnings driver, has also seen a decline, with a year-over-year decrease of 80 basis points in the third quarter. This shift from tailwinds to headwinds in freight, pricing, and channel mix, combined with the company’s stance on growth investment, is expected to limit near-term margin expansion.

The firm's forecast for Skechers' earnings per share (EPS) stands at $4.63, below the market consensus of $4.95.

Foot Locker, on the other hand, is viewed as an attractive earnings-recovery story for 2025. The company is expected to benefit from a renewed relationship with Nike (NYSE:NKE), momentum in non-Nike brands, and leveraging recent investments in selling, general, and administrative expenses (SG&A).

Needham anticipates a fundamental improvement in Foot Locker's performance, driven by these factors and a merchandise margin recovery.

“While we believe FL is in the midst of a post-back-to-school lull, we believe trends may reaccelerate post-Thanksgiving, and we're encouraged by a recent consumer survey that showed high consumer interest in sneaker this Holiday season,” Nikic said.

The firm highlighted the potential for Foot Locker's positive comp growth in the coming years, supported by Nike's decision to increase allocations of high-demand products to the retailer starting in the fourth quarter of 2024. Additionally, the retailer's tech investments are expected to taper off, setting the stage for meaningful margin expansion in fiscal year 2025.