Markets have been so focused on earnings from the technology sector this quarter that they have completely let other companies fly by right under their noses. Stocks in the consumer discretionary sector might be falling out of favor as the U.S. consumer struggles with inflation and rising credit card delinquencies, but they have recently found reason to stay positive, judging by the uptick in consumer confidence.

The optimism might be rooted in the fact that the Federal Reserve (the Fed) is looking to cut interest rates before 2024 is over. The CME’s FedWatch tool now forecasts these cuts to be here as soon as September. With this in mind, real value investors would appreciate the recent 12% selloff in shares of Foot Locker Inc. (NYSE: FL) after the company reported its second quarter 2024 earnings results.

While there are some reasons for concern, the bottom line is that management is trying to head in the right direction regarding securing future profitability and growth. For this reason, Wall Street analysts willing to go the contrarian route have willingly made their bullish thesis for Foot Locker stock public, something value investors (not afraid to go against the crowd) could come to appreciate.

Efficiency Set to Boost Foot Locker Stock's Earnings

The top line would look fine when investors look inside Foot Locker's earnings press release. Total sales growth of 1.9%, comparable sales up by  2.6%, and a gross margin expansion of 0.5% over the past year doesn't sound like a business that should be selling off by over 10%.

The problem is the business's operating efficiencies, which hit Foot Locker's bottom-line earnings. On a per-share basis, Foot Locker reported a net loss of $0.13, but reading between the lines will catch those willing to look off guard.

Looking at the cash flow statement, the picture looks different. Operating cash flows swung from negative $184 million in 2023 to positive $126 million this quarter, a divergence from the net income item. A concern is being put to rest before investors learn about management efficiency initiatives.

Nike Inc. (NYSE: NKE) and Adidas (OTCMKTS: ADDYY) have stated that they will resume their relationships with Foot Locker, allowing the brand to keep selling its merchandise now that inventory issues have been addressed. So, if it isn't relationships and the consumer cycle that are keeping earnings down, what else is keeping them down?

It's location, and management knows this. Although being headquartered in New York might have been great in 1974, when the company was founded, today, New York is filled with taxes that make most businesses headquartered there inefficient. Foot Locker is now going to call sunny Florida its home.

For reference, Foot Locker's press release stated that the company paid an effective tax rate of 35% and is expected to pay between 33% and 34% in the next 12 months. While these are not horrible rates, it is no secret that the company could achieve a much more efficient rate when moving to Florida.

Hedge fund Citadel and even Cathie Wood have made the same move to save on taxes. These efficiencies will directly affect the company's net earnings and earnings per share (EPS) as more tax savings trickle down to shareholders.

This has made the job easier for Wall Street analysts to forecast up to 39.1% EPS growth in the coming year, which is way above competitors in the athlete wear space like Lululemon Athletica Inc. (NASDAQ: LULU) with its forecast for 9.9% EPS growth. That is where deep value investors can begin to get excited, but they wouldn't be the only ones.

Wall Street Is Catching On to the Potential Upside in Foot Locker Stock

This potential upside for the coming quarters gives some Wall Street analysts further confidence. Precisely, Evercore has placed a price target of up to $38 a share on Foot Locker stock as of August 2024, up from their previous valuation of $34 a share.

To prove these analysts right, the stock would need to rally by as much as 29% from where it trades today, a net upside that the earnings selloff has recently amplified. Institutional capital has also made its way into the stock in light of these recent bullish findings.

Knowing that interest rate cuts are just around the corner, Dimensional Fund Advisors has boosted its position in Foot Locker stock by 1.5% as of August 2024. This would net their investment at $117.1 million, making it the second-largest shareholder, lagging only behind those at the Vanguard Group.