Here’s why Foot Locker stock rose 22% last month.

stocks of shoe retailers foot storage box (FL -28.46%) It rose 22.3% in February, according to data provided by S&P Global Market Intelligence. It was a largely quiet month for the company, but there were some vague conversations about interest from activist investors. And indeed, this may be an attractive situation for them.

Activist investors typically believe that companies are undervalued or not living up to their potential due to poor management. So they buy a large stake in the business to influence improvements. Perhaps the rumor about Foot Locker’s activist investors gave the market hope that a rebound was imminent and would lead to a rally in February.

It appears that investors will have to wait longer. On March 6, Foot Locker’s stock price plummeted after reporting financial results for the completion of fiscal 2023 (the fiscal year ending February 3). The so-called turnaround does not appear to be any closer. Last year, the company’s sales increased only 2%. But gross margins have plummeted because management is relying solely on price cuts.

In other words, Foot Locker is lowering its prices to sell. However, this only results in running in place. Additionally, management previously provided some financial targets for fiscal 2026. However, with the 2023 report, management pushed these goals forward to fiscal 2028.

Why do activists care?

Foot Locker is a well-known brand with over 2,500 stores across various clothing retail chains. Moreover, with annual sales exceeding $8 billion, consumers still frequent our stores. And finally, despite its difficulties, it is still a highly profitable company. Adjusted earnings per share (EPS) for fiscal 2023 were $1.42. The adjustments were related to investments, not business operations.

That said, Foot Locker’s management team has a lot to work with to create shareholder value. This is why activist investors can vacillate on this issue. Plus, at just 0.3x trailing sales, Foot Locker stock is incredibly cheap.

FL PS Ratio data from YCharts. PS Ratio = Price to Sales Ratio.

What now?

If I were an activist investor, I wouldn’t gamble on a Foot Locker turnaround. In my opinion, the company is in a difficult situation for the long term.

Foot Locker’s management is driving revenue growth of up to 6% per year over the long term. In the first year of planning, we have already fallen far short of this goal.

Additionally, a key component of Foot Locker’s growth plan involves its loyalty program. In fiscal 2028, 50% of revenue is expected to come from loyal customers. However, loyalty program revenues are currently only at 21% and have not grown at all over the past year.

In an age where consumers can buy shoes directly from shoe companies more easily than ever before, I think it will be difficult for Foot Locker to remain marketable without aggressive price cuts like it has done in recent years. That means if I’m wrong and the conversion happens, Foot Locker stock will very Attractive price.