Two firms say Foot Locker wins from a strategy shift at Nike. We're not so sure

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Wall Street sentiment toward Foot Locker is warming up after Nike recently said it would focus more heavily on wholesale partnerships — a domain the athletic shoe retailer is a key player in. We still have reservations. Two research firms upgraded Foot Locker shares over the past week: Evercore ISI went to buy from hold Monday, a move that follows an update from Citi to hold from sell, on Friday. Both argued that Nike's return to selling merchandise through department stores and retailers is a major catalyst for Foot Locker. It also marks a sharp reversal for Nike, which has spent years focused on direct-to-consumer digital sales. These upgrades helped lift FL shares nearly 6% Monday to roughly $25 apiece. The stock is still down 17% year to date. FL YTD mountain FL stock performance year-to-date. "I'm thrilled because it's been a very weak stock," Jim Cramer said Monday on CNBC. "But that's about Nike being more aggressive. Nike did not have a good quarter, and I think there's a recognition that maybe their product line needs to be refreshed entirely." Jim raised concerns about Nike's leadership position in sports apparel after the company issued a disappointing outlook for the current quarter as it looks to replace some shoe lines and battles increasing competition. "I thought Nike was sad. Nike's been a leader. A lot of people [say], 'Don't worry. Nike comes back. Don't worry.' I felt worried. I felt that if they have to start embracing Foot Locker more, eh, man, if that's the strategy. Wow," Jim said. Nike saying it wants to do more business with Foot Locker is a positive development. During its fiscal third quarter webcast, Nike emphasized its wholesale partners' ability to help "scale our innovation and newness in physical stores and connect our brands in the path of the consumer." "We think we've got the right partners," Nike added. "Our focus is on our current partners right now and elevating the experience of our brand with them." While there's "no guarantee" that Foot Locker will benefit from Nike's pivot, Citi said, increased allocation of Nike products at Foot Locker "would be a positive" for sales and margins over time. The analysts see the risk-reward tradeoff on FL as "more balanced." Evercore ISI turned "more confident" on Foot Locker after it gathered positive takeaways from meeting with the FL's management team. After the company aggressively scaled down its inventory "FL is now chasing demand again for the first time in 18 months," the analysts said. Foot Locker's "Lace Up" strategy executed by CEO Mary Dillon, hired in September 2022 to put the business on a path toward sustainable profit growth, has been taking longer than we anticipated. But the analysts believe "the most difficult challenges are now in the past. "With broken inventories now improved and multi-faceted new growth initiatives coming online, FL has pivoted back to share gains in each of the past 4 months," the analysts wrote. Foot Locker also confirmed it has "also now gained share in the U.S in February," they added. The firm estimates Foot Locker can return to stable low-to-mid-digit sales growth in the second half of 2024 while recapturing lost merchandise margin from 2023. Additionally, they said Foot Locker can achieve its operating margin target of 8.5% to 9% before 2028. Analysts slightly increased their earnings per share estimates for fiscal years 2024 and 2025 to $1.75 and $2.40, up from their previous $1.70 and $2.35. We have a small position in the portfolio that we're keeping for now. The company may be in a better position to improve profitability now that it has cleared out a lot of its inventory and as it makes space for more Nike products. We maintain our 4 rating on the stock. (Jim Cramer's Charitable Trust is long FL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED. People walk past the damaged entrance to a Foot Locker shop of a in Dublin on November 24, 2023, following a night of protests. Violence that erupted in Dublin after three children were injured in a knife attack was of a level not seen for decades, Ireland's police commissioner said on Friday. Paul Faith | Afp | Getty Images