Foot Locker Breaks Out Of The Pack

9/29/2014


  Recent Price
$57
  Dividend
$0.88
  Yield
1.5%
  P/E Ratio
18
  Shares (millions)
146
  Long-Term Debt as % of Capital
5%
  52-Week Price Range
$58.40 - $32.10

Foot Locker ($57; FL) shares have tallied a 39% total return in 2014, while the S&P 1500 consumer discretionary sector has barely budged, its average stock's performance dead last among the 10 sectors. Yet Foot Locker still looks cheap at 18 times trailing earnings, a 16% discount to its five-year average and 5% below its sector median.

The retailer is not without its risks. Foot Locker has high exposure to both Nike ($81; NKE) merchandise, which generates about 65% of its sales, and basketball footwear, rendering it sensitive to weakness in either area. Despite strong results in footwear in recent quarters, apparel is struggling, especially in Europe.

However, Foot Locker has a track record for delivering growth, and its near-term outlook is bright. Four of six Quadrix category scores exceed 90, contributing to an Overall rank of 98. Foot Locker, with both sector-specific Quadrix scores above 95, is a Focus List Buy and a Long-Term Buy.

Anatomy of an outperformer

Foot Locker adheres to a conservative expansion strategy, with its total store count actually shrinking 3% over the past five years. Management prefers investing in existing assets by remodeling stores and improving merchandise allocation. Foot Locker is capturing larger market share via both its physical stores and e-commerce.

Same-store sales have risen in 18 straight quarters, exceeding 5% in 14 of those periods. Operating profit margins have expanded in each of the past 19 quarters, while return on assets stands at its highest level in at least eight years.

For the 12 months ended July, Foot Locker's revenue climbed 9%, cash from operations 32%, and free cash flow 71%. Same-store sales surged 7.3% in the first half of fiscal 2015 ending January.

Last month management largely reiterated guidance issued in March that calls for same-store sales to rise by the mid-single-digits in the second half of 2014. The company expects double-digit growth in per-share profits as margins continue to expand.

That outlook seems unduly timid, for several reasons.

• Foot Locker said same-store sales rose at a high-single-digit rate through the first three weeks of August.

• Recent industry trends are robust, especially for basketball, a Foot Locker stronghold. Industrywide sales of basketball footwear rose 14% in August, helped by a 4.5% price increase and the launch of new models according to Sterne Agee. Sales of running shoes advanced 4% for the month. Footwear enjoyed a strong boost during back-to-school season, which stretches from late July through mid-September. A strong slate of new basketball shoes debuts this fall.

• Foot Locker now plans to open 80 stores for the year, up from its prior target of 60, mostly in Europe or under the Kids Foot Locker nameplate.

The consensus projects 16% higher per-share profits for the October quarter and 11% growth for the January quarter. Analyst estimates have trended higher in the past month. Foot Locker has topped consensus profit targets in four consecutive quarters and 16 of the past 18.

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 '14
0.64
vs.
0.46
13%
52.07
-
46.20
17 - 15
Apr '14
1.11
vs.
0.91
14%
48.71
-
36.65
17 - 13
Jan '14
0.82
vs.
0.64
5%
41.73
-
34.09
16 - 13
Oct '13
0.68
vs.
0.63
6%
37.85
-
31.91
14 - 12
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
6.51
2.87
0.80
41.73
-
31.30
15 - 11
2013
6.18
2.47
0.72
37.65
-
26.29
15 - 11
2012
5.62
1.82
0.66
26.82
-
16.66
15 - 9
2011
5.05
1.10
0.60
20.08
-
11.30
18 - 10
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
98
95
64
93
68
100
94

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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