Analysts' Choice: Foot Locker Still In Stride

1/23/2017


  Recent Price
$69
  Dividend
$1.10
  Yield
1.6%
  P/E Ratio
15
  Shares (millions)
134
  Long-Term Debt As % Of Capital
5%
  52-Week Price Range
$79.43 - $50.90

While we appreciate Foot Locker's ($69; FL) near-term potential, what stands out is its consistency. Like any good distance runner, Foot Locker has learned to keep a steady pace.

Over the last 24 quarters, the athletic-shoe retailer has delivered median per-share-profit growth of 22%, with no quarter dipping below 8%. Sales growth has been even more consistent; the last time sales fell was the October 2009 quarter. Growth has slowed in recent quarters to a more manageable pace, and we aren't the only ones who expect Foot Locker to keep making good time.

Analysts estimate profit gains of 14% in the January quarter, 10% in the year ending January 2018, and 10% annually over the next five years. Given Foot Locker's history, those targets seem conservative. Foot Locker, which earns a Quadrix Overall score of 96, is rated Buy and Long-Term Buy.

Winning the race

One explanation for both Foot Locker's steady history and analysts' solid expectations involves demographic trends. In 2015, 17 million Americans ran in foot races — down from the record 19 million in 2013 but well above the 9 million who ran in 2005. Worldwide, more people are turning to physical fitness in an effort to improve their health, creating new groups of customers Foot Locker knows how to reach.

At the end of October, Foot Locker operated 3,394 stores in 23 countries in North America, Europe, Australia, and New Zealand, with franchises opening in the Middle East and South Korea. The company has focused its expansion efforts in two directions: overseas, and Kids Foot Locker.

Augment the grass-roots demand drivers with a stream of new and innovative products, and you have a recipe for market-beating growth. Despite its compelling profit story and our confidence growth will continue (Quadrix earnings-predictability score of 99), Foot Locker trades at an appealing price. You can purchase it for just 14 times expected year-ahead earnings, 19% below the average for apparel retailers in the S&P 1500 Index.

The stock also trades at a modest discount to its three-year average for trailing price/earnings and price/operating cash flow. Foot Locker's Quadrix Value score has risen to 84 from 75 at the end of October and 50 a year ago.

A combination of cost controls and improved productivity has kept profit margins widening. Margins have trended mostly higher for more than eight years. In the 12 months ended October, operating margin reached a record 14.9%, up from 14.4% a year ago and 12.2% three years ago. Analyst targets imply more margin gains in the year ahead.

Conclusion

In the October quarter, Foot Locker grew same-store sales 4.7% and per-share-earnings 13% excluding special items, topping analyst targets. The picture isn't perfect, with basketball-shoe sales weaker than expected. But Foot Locker has had success moving most of its higher-priced inventory without too many markdowns, another sign of strong demand for its products.

You can obtain an annual report for Foot Locker Inc. at 330 W. 34th St., New York, NY 10001, (212) 720-3700, www.footlocker.com.

FOOT LOCKER
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Oct '16
1.13
vs.
1.00
5%
69.61
-
56.80
16 - 13
Jul '16
0.94
vs.
0.84
5%
62.45
-
50.90
14 - 12
Apr '16
1.39
vs.
1.29
4%
69.65
-
58.17
16 - 14
Jan '16
1.16
vs.
1.00
5%
69.99
-
57.23
17 - 14
           
Year
(Jan.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2016
7.41
4.29
0.97
77.25
-
52.12
18 - 12
2015
7.15
3.58
0.86
59.19
-
36.65
17 - 10
2014
6.51
2.87
0.78
41.73
-
31.30
15 - 11
2013
6.18
2.47
0.71
37.65
-
26.29
15 - 11
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
96
70
84
95
77
84
38

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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