Foot Locker Outruns The Pack

8/27/2012


  Recent Price
$34
  Dividend
$0.72
  Yield
2.1%
  P/E Ratio
16
  Shares (millions)
154
  Long-Term Debt as % of Capital
6%
  52-Week Price Range
$36.00 - $18.02

Even in the fast-paced S&P 1500 Consumer Discretionary Sector Index, up 16% for the year, Foot Locker ($34; FL) is a front runner, up 44%.

Operating momentum deserves much of the credit for that performance. In each of the last four quarters, sales rose at least 5% and per-share profits 30%. In the July quarter, sales rose 7% to $1.37 billion and per-share profits jumped 58% to $0.38, topping the consensus by a nickel. Same-store sales jumped 9.8% on a combination of higher prices and greater store traffic.

Yielding 2.1% and scoring above 95 for both of our sector-specific ranks, Foot Locker is a Buy and a Long-Term Buy.

Business breakdown

At times the London Olympics looked like an extended commercial for Nike ($96; NKE), with more than 400 competitors — track athletes, boxers, and even fencers — sporting bright green Nike shoes. That clever strategy to circumvent the Olympics' strict marketing rules could translate into higher sales at Foot Locker, the largest U.S. footwear retailer. Nike products make up about 50% of Foot Locker's inventory.

The retailer says same-store sales have risen at double-digit rates so far this month, including healthy growth in Europe, helped by the Olympics. Consumers continue to spend on new shoes and apparel for running and basketball.

The sales growth coincides with management's emphasis on fattening profit margins. Gross profit margins have expanded in 10 consecutive quarters, helped by a shift away from lower-margin products. The retailer has also limited markdowns by managing its inventory, up just 1% year-over-year on a per-store basis in the July quarter. A new emphasis on private-label products should help support continued margin expansion.

Foot Locker operates about 3,350 stores in North America, Europe, Australia, and New Zealand. The total store count has not risen since 2006. Foot Locker has pruned its U.S. presence (the store count of 2,518 is down 8% from two years ago and 21% from five years ago) while expanding overseas (836 stores, up 12%, 15%).

Seeking to converge physical stores with its website, Foot Locker is testing new payment options and also the use of handheld computers by its U.S. sales staff. Foot Locker sees the devices as tools to boost sales — customers can place an order for home delivery when the store doesn't stock the shoe in the desired size or color — without sacrificing the goal to keep inventories running lean.

Conclusion

The stock trades at 16 times trailing earnings, 38% below its three-year average. Looking ahead, the consensus projects earnings growth of 34% in the fiscal year ending January 2013. Investors seem skeptical of Foot Locker's ability to meet that target, even though it has topped the consensus profit estimate by more than 7% in 10 straight quarters. Foot Locker trades at 14 times estimated profits for the current year, below the median forward P/E ratio of 16 for its peers. An annual report for Foot Locker Inc. is available at 112 W. 34th St., New York, NY 10120; (212) 720-3700; www.footlocker-inc.com.

Foot Locker
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jul '12
0.38
vs.
0.24
+ 7%
34.00
-
27.86
17 - 14
Apr '12
0.83
vs.
0.60
+ 9%
32.27
-
26.29
18 - 14
Jan '12
0.55
vs.
0.39
+ 8%
26.82
-
20.82
16 - 13
Oct '11
0.43
vs.
0.33
+ 9%
23.01
-
16.66
15 - 11
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2012
5.62
1.82
0.65
26.82
-
16.66
15 - 9
2011
5.05
1.10
0.60
20.08
-
11.30
18 - 10
2010
4.85
0.54
0.60
12.95
-
7.09
24 - 13
2009
5.24
0.68
0.58
18.19
-
3.65
27 - 5
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
86
57
77
70
82
93

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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