It feels like the worst is over for Foot Locker, Inc. (NYSE:FL). Foot Locker stock fell 34% in 2017, with the declines in FL stock catalyzed by major plunges after first-quarter results in May and Q2 results three months later.

But FL stock has bounced 75% after hitting a five-year low in late November — thanks, in part, to some outside help. Retail stocks as a whole have rallied, including mall retailers like Foot Locker.

Corporate tax reform — which gave the biggest benefits to domestically-focused companies like Foot Locker — has raised optimism. Foot Locker helped itself with a Q3 beat that assuaged some of the concerns highlighted in the first half.

Meanwhile, Foot Locker’s key supplier, Nike Inc (NYSE:NKE), has rallied as well. NKE stock has bounced 32% just since October. With both sneakers and retail looking healthier, Foot Locker stock has gained.

To be honest, I’m still skeptical on both fronts. Much of the benefits from lower taxes for retailers simply may be “competed out” amid further intense pricing pressure. The sneaker business may be better than feared a few months ago — but the space continues to have mid- to long-term concerns.

But for investors more optimistic about both sectors, FL stock is a strong play. It’s the dominant retailer in its business. Digital growth should continue, even as Nike and adidas AG (ADR) (OTCMKTS:ADDYY) build out their own direct-to-consumer (DTC) efforts. And Foot Locker still is rather cheap. I don’t own FL stock — and I don’t plan to buy it — but I can see why other investors might.

Mall Retail Survivors

One obvious concern for Foot Locker is its exposure to declining mall traffic. There’s more to the “death of the mall” narrative than just Amazon.com, Inc. (NASDAQ:AMZN), and I agree with more bearish prognosticators who foresee hundreds of malls closing over the next few years.

But in that space, FL does have some differentiation. It’s much larger, and far more dominant, than smaller rival Finish Line Inc (NASDAQ:FINL). Its importance to Nike, adidas, and Under Armour Inc (NYSE:UA,NYSE:UAA) gives it solid allocations of the hottest styles. (Finish Line has been trying to get its share for years, with mixed success.)

Meanwhile, relative to broader apparel retailers, Foot Locker stores remain a destination. Sneakers — particularly high-end, full-price models — aren’t an impulse purchase. The vicious cycle of declining mall traffic thus should have a lesser effect on Foot Locker revenue — and Foot Locker stock.

Indeed, on the Q3 conference call, management admitted to the pressure on the mall business. Foot Locker plans to close underperforming locations. But CEO Richard Johnson explained that even in weaker malls, “profit performance … has tended to hold up relatively well this year.” As such, “it makes no sense to us to rush and close hundreds of [those stores].”

Out of mall retailers, Foot Locker looks the strongest. And yet it trades at a discount to many mall peers. Most notably, on a price-to-earnings basis, FL stock is much cheaper than FINL stock, backing out both companies’ net cash. That makes literally zero sense. At the very least, a long FL/short FINL pair trade — which has been profitable for years — looks attractive.

Foot Locker Stock Is Undervalued

With the concerns about mall retail, there’s a question as to whether Foot Locker stock is the best play on the sneaker business. Given that Nike supplied a whopping 68% of Foot Locker inventory last year, according to the Foot Locker 10-K, any investor bullish on Nike should just buy Nike stock.

But Foot Locker might be a better derivative play, simply because of the valuation gap. FL stock trades at roughly 10 times next year’s consensus earnings-per-share estimates. NKE stock, in contrast, trades at 24x. Adidas trades at nearly 20x. (UAA trades at a whopping 60x, but investors there are pricing in a turnaround that I still believe isn’t coming.)

NKE stock should trade at a premium to FL stock for a number of reasons. It can control its allocations; Foot Locker is at its mercy. Nike’s margins are higher. It has more operating leverage in its business model, particularly with its own DTC growth. It has more financial leverage on its balance sheet as well. Valuation aside, NKE is a more attractive stock.

But the valuation gap here is such that it can’t be ignored. NKE stock is pricing in rather substantial free cash flow growth going forward. FL stock, in contrast, is pricing in a decline. And as bearish as I am on retail, that still looks a touch too aggressive.

After all, Nike needs Foot Locker — and continues to treat it like a valued customer (and valued outlet). Foot Locker’s operating leases are a concern, but the company has flexibility to exit underperforming leases and, possibly, to negotiate rent reductions. FL’s own digital efforts are growing, and its still the preeminent brand in US sneakers.

At the least, FL stock is a sure sight better than other mall retailers. And it’s so much cheaper than NKE or even ADDYY that it seems a more attractive play on sneakers. I still worry about absolute returns, and FL is vulnerable to wider pullback in retail. But for investors willing to take the risk, it’s hard to find a better choice than Foot Locker stock.

As of this writing, Vince Martin has no positions in any securities mentioned.

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