Analysts' Choice: Foot Locker Outruns The Pack

8/10/2015


  Recent Price
$72
  Dividend
$1.00
  Yield
1.4%
  P/E Ratio
19
  Shares (millions)
142
  Long-Term Debt As % Of Capital
5%
  52-Week Price Range
$72.80 - $48.10

Foot Locker ($72; FL) shares have delivered a total return of 51% in the past year, pushing the stock's Value rank down to a middling 50 from 77 at the end of July 2014. In the past three months alone, the stock has returned 20%, ranking in the top 10% of our research universe.

We see room for more share-price appreciation and do not yet view Foot Locker, a Focus List Buy and a Long-Term Buy, as overly expensive. For a company that sells footwear, the time-honored phrase "let your winners run" seems appropriate.

Consider the following key points:

The retailer generates an abundance of cash — and shares it with investors. Operating cash flow climbed 19% to $653 million in the 12 months ended April, while free cash flow surged 42% to $322 million. Foot Locker has returned most of its excess cash to shareholders. Stock buybacks and dividend payments totaled $507 million during the 12-month period, representing 93% of net income and 78% of operating cash flow. Foot Locker raised its quarterly dividend 14% in March, its biggest hike since 2008 and the fourth straight year of double-digit growth. Despite these shareholder-friendly moves, Foot Locker builds cash faster than it spends. Net cash equals $6 per share, up 2% from a year ago.

Foot Locker boasts an outstanding track record for operating growth and efficiency. True, revenue rose just 3% in the April quarter, the retailer's weakest quarter since 2010. But sales climbed 8% at constant currency. Foot Locker has also produced 20 straight quarters of higher same-store sales, including an average of 8% growth in the past four quarters, higher than any of the other 23 apparel retailers in the S&P 1500 Index. The retailer has seen its growth accelerate year-over-year in each of those four quarters. Foot Locker has also become more efficient, with its inventory turnover and operating profit margins steadily improving. Returns on assets and equity are also marching higher.

Europe is finally turning around. Management said its international stores drove growth in the April quarter, with sales in Europe up by low-double-digits. In recent years, Foot Locker has bet big on Europe via internal investments and its $87 million acquisition of Runners Point. About 24% of Foot Locker's stores are located in Europe, up from 17% in 2013.

Foot Locker's seasonally light July quarter is shaping up to be strong. Rival Finish Line ($29; FINL) and key supplier Nike ($117; NKE) posted robust May-quarter results. Both companies noted rising average sales prices, which should also benefit Foot Locker. Nike accounted for 73% of athletic merchandise bought by Foot Locker in fiscal 2015 ended January. Foot Locker expects same-store sales to rise by mid-single digits for the July quarter. The retailer got off to a quick start, with sales up by double-digits through late May. The consensus expects per-share profits to climb 8% in the quarter.

The stock isn't as pricey as it looks. At 19 times trailing earnings, shares trade roughly in line with the median for S&P 1500 apparel retailers and the median for the consumer-discretionary sector.

An annual report for Foot Locker Inc. is available at www.footlocker-inc.com, or at 122 W. 34th St., New York, NY 10120, (212) 720-3700.

FOOT LOCKER
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Apr '15
1.29
vs.
1.11
3%
63.66
-
52.12
18 - 15
Jan '15
1.00
vs.
0.82
7%
59.19
-
51.12
17 - 15
Oct '14
0.83
vs.
0.68
7%
58.40
-
47.50
21 - 17
Jul '14
0.64
vs.
0.46
13%
52.07
-
46.20
20 - 18
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
7.15
3.58
0.88
59.19
-
36.65
17 - 10
2014
6.51
2.87
0.80
41.73
-
31.30
15 - 11
2013
6.18
2.58
0.72
37.65
-
26.29
15 - 10
2012
5.62
1.81
0.66
26.82
-
16.66
15 - 9
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
75
50
94
74
92
92

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


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