Analysts' Choice: Investors Enjoy Foot Locker's Style

2/1/2016


  Recent Price
$66
  Dividend
$1.00
  Yield
1.5%
  P/E Ratio
16
  Shares (millions)
141
  Long-Term Debt As % Of Capital
5%
  52-Week Price Range
$77.25 - $52.12

Foot Locker's ($66; FL) success hinges on the fickle tastes of its core customers, ages 15 to 25, but investors consistently find the shares fashionable. The stock generated a total return of 24% over the past year and has risen 1% so far in 2016, while the S&P 1500 Index sank 8%.

That rally over the past 12 months has pushed Foot Locker's Quadrix® Value rank down to 56 from 72. At 16 times trailing earnings, the stock trades in line with its own five-year average and 8% above the average for S&P 1500 apparel retailers. Excluding net cash of $5.30 per share, Foot Locker trades at 14.6 times earnings, in line with its industry average.

Despite a middling valuation, we remain confident Foot Locker, a Focus List Buy and a Long-Term Buy, has further to run.

Room to grow

Foot Locker's January-quarter report will probably hit the market in early March. The retailer is expected to post earnings per share of $1.12, up 12%, on revenue of $2.00 billion, up 5%. Foot Locker has topped analyst expectations by at least $0.05 per share in each of the past eight quarters.

Anecdotal data for the January quarter appear encouraging:

• U.S. retail sales rose 3.3% from Oct. 31 to Jan. 4 despite falling foot traffic, estimates researcher First Data. Consumers spent more on eating out, automobiles, and home-improvement projects, while demand for clothing was notably weak — except for athletic apparel or "athleisure."

• Key supplier Nike ($60; NKE) reported impressive growth for the November quarter. More importantly, Nike's global futures orders, or expected deliveries for December through April, jumped 20% excluding currency effects, well ahead of the consensus estimate of 14%. Futures orders for North America rose 14%. Nike provided 73% of Foot Locker's athletic merchandise last year.

• Rival Finish Line's ($18; FINL) same-store sales rose 6.2% in December. Foot Locker likely benefited from Finish Line's inventory mishaps in November, but the December growth suggests sneaker demand remains solid.

• Recent job growth and savings from low fuel prices should boost discretionary income for Foot Locker's core customer.

At the same time, growth has decelerated in Foot Locker's basketball category — a trend that merits monitoring. Foot Locker controls an estimated 45% share of the U.S. market for basketball shoes. In addition, the rising U.S. dollar has slowed Foot Locker's revenue growth. Revenue for the 12 months ended October rose 4%, marking the retailer's slowest gain since the 12 months ended January 2011.

Nevertheless, underlying momentum remains strong. Same-store sales, which exclude the effects of foreign currency, have risen more than 7.5% in each of the past four quarters. Foot Locker's same-store sales have topped 1.5% in 23 consecutive quarters, a feat accomplished by no other apparel retailer in the S&P 1500 Index. Both online sales (accounting for about 11% of Foot Locker's revenue) and expansion in Europe (about 25%) help drive the retailer's growth.

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
Oct '15
1.00
vs.
0.83
4%
77.25
-
63.02
20 - 16
Jul '15
0.84
vs.
0.63
3%
71.07
-
59.52
19 - 16
Apr '15
1.29
vs.
1.10
3%
63.66
-
52.12
18 - 15
Jan '15
1.00
vs.
0.82
7%
59.19
-
51.12
18 - 15
           
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
94
81
56
94
74
95
71

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


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