Foot Locker's Exclusion from S&P Global BMI Index: A Mispricing Opportunity in Retail?

The recent exclusion of Foot Locker Inc. from the S&P Global BMI Index has sparked debate among investors about its implications for the stock’s valuation and the broader retail sector. While the move reflects the company’s ongoing struggles with store closures and shifting consumer behavior, it also raises questions about whether the market has overreacted, creating a potential mispricing opportunity.

Index Rebalancing and Methodology: A Closer Look

Foot Locker’s removal from the S&P Global BMI Index on May 16, 2025, followed the announcement of its acquisition by Dick’s Sporting Goods, which significantly altered its debt profile and market position [3]. The S&P Global BMI Index, which measures benchmarking intensity—the cumulative weight of a stock in all benchmarks—typically excludes companies whose inclusion would distort index performance or create conflicts with other indices, such as the S&P 500 or CRSP indexes [1]. Foot Locker’s exclusion aligns with broader index methodology trends, where underperforming or structurally challenged firms are removed to maintain index integrity.

However, the timing of the exclusion coincided with a critical juncture for the company. In 2024, Foot Locker closed 118 stores, with eight more closures planned for 2025, reflecting a strategic pivot away from brick-and-mortar retail amid inflationary pressures and the rise of e-commerce [2]. These operational challenges likely contributed to its declining benchmarking intensity, signaling to fund managers that the stock’s inclusion in benchmarks was no longer optimal [2].

Stock Price Reaction and Mispricing Potential

Index exclusions often trigger short-term volatility, as passive and active fund managers adjust portfolios. Historically, stocks removed from benchmarks tend to experience downward pressure due to selling by index-tracking funds. While specific data on Foot Locker’s post-exclusion price movement is unavailable, studies on benchmarking intensity suggest that reduced BMI correlates with lower institutional ownership and higher future stock volatility [4].

The acquisition by Dick’s Sporting Goods, announced just days before the exclusion, adds complexity. According to a report by CreditSights, Foot Locker’s debt surged by over 10 points following the deal, raising concerns about financial stability [3]. Yet, the acquisition also offers a lifeline, potentially streamlining operations and reducing costs. This duality—between structural risk and strategic rebirth—creates ambiguity for investors.

Retail Sector Valuation Shifts: A Broader Context

Foot Locker’s exclusion must be viewed through the lens of a sector-wide transformation. The retail apocalypse, marked by 15,000 U.S. store closures in 2025, has accelerated the shift to online shopping and compressed valuations for traditional retailers [2]. Companies like Macy’s and CVS have similarly faced store closures and declining foot traffic, suggesting that Foot Locker’s exclusion is part of a larger trend rather than an isolated event.

However, this sector-wide decline may have created pockets of undervaluation. For instance, Foot Locker’s stock trades at a significant discount to its peers, reflecting pessimism about its physical retail model. Yet, its digital sales have grown steadily, and the Dick’s acquisition could provide a platform for innovation. If the market has overcorrected, the exclusion might represent an entry point for investors willing to bet on a turnaround.

Assessing the Opportunity

The key question is whether the exclusion has exacerbated an already overvalued pessimism or corrected an undervalued reality. On one hand, the combination of store closures, debt concerns, and index exclusion suggests continued downward pressure. On the other, the acquisition by Dick’s Sporting Goods introduces potential synergies and cost savings that could stabilize the business.

For investors, the mispricing opportunity hinges on two factors:
1. Short-term liquidity: Index-driven selling could depress the stock further, but this may be temporary if the acquisition proceeds smoothly.
2. Long-term structural trends: The retail sector’s shift to e-commerce is irreversible, but Foot Locker’s digital capabilities and Dick’s integration strategy will determine its ability to adapt.

Conclusion

Foot Locker’s exclusion from the S&P Global BMI Index is a symptom of broader retail sector challenges rather than a standalone event. While the move reflects the company’s operational and financial struggles, it also underscores the dynamic nature of index rebalancing in response to market conditions. For investors, the question of mispricing remains unresolved. A cautious approach—monitoring the acquisition’s progress and the company’s digital transformation—may be prudent, as the retail landscape continues to evolve.

**Source:[1] Benchmarking Intensity | The Review of Financial Studies [https://academic.oup.com/rfs/article/36/3/859/6665907][2] Retail Apocalypse: Macy's, CVS, and Foot Locker lead wave of 15,000 store closures in 2025 [https://m.economictimes.com/news/international/global-trends/retail-apocalypse-macys-cvs-and-foot-locker-lead-wave-of-15000-store-closures-in-2025/articleshow/119433473.cms][3] US Weekly Insights: Alera's ~$4bn 1L/2L private credit ... [https://know.creditsights.com/us-weekly-insights-aleras-4bn-1l-2l-private-credit-takeout-headlines-revival-in-opportunistic-business-new-fortress-energy-debt-tumbles-after-big-q1-miss/][4] Benchmarking Intensity [https://www.researchgate.net/publication/362682765_Benchmarking_Intensity]