Aggressive · Stocks to Consider and Updates

Stock to Consider: Foot Locker, Inc.

FLAthletic footwear and apparel retailer, Foot Locker, Inc. (NYSE: FL – $48.90) – morphed from the once iconic F.W. Woolworth “Five-and-Dime”  store chain – operates 3,473 stores under multiple brands, including the core Foot Locker chain (54% of total stores, with 63% in North America, 32% in Europe and 5% in Asia). Other brands include Champs Sports (about 15% of total sales), Kids Foot Locker (9%), Lady Foot Locker (8%), Footaction (8%) and Runners Point (6%). International operations generate 30% of sales and the company sells directly to customers through its websites: Foot, Eastbay (for the serious athlete) and skating enthusiast site CSS. Its namesake store offers athletic-inspired footwear, apparel and accessories manufactured by leading athletic brands such as Nike, Adidas, Reebok and Under Armor. Lady Foot Locker and Kids Foot Locker stores cater to their respective clientele. Footaction and Champs are specialty operations and Runners Point was an acquisition made last year to gain market share in Germany. 

Store re-modeling expenditures will replace about forty underperforming locations. The company has earmarked $220 million to re-do 300 outlets this year and improve its digital direct sales business. Foot Locker boasts steady growth, shrewd inventory management and a fortress-like balance sheet. Same-store sales have risen in 16 straight quarters and averaged 6.9% growth in the past ten quarters. For the just released first quarter, New York City-based Foot Locker posted stronger-than-expected growth especially on the demand side where same-store sales rose a stout 7.6% after climbing 5.2% a year earlier, despite weather related issues that hampered most other retailers. Core inventory remains well in hand as well, increasing just 3.2%. The company posted adjusted earnings in the quarter ended May 3rd of $1.11 per share up from $0.91 the year earlier, and exceeding the $1.06 average estimate from analysts. Sales rose 14% to $1.87 billion compared to $1.64 billion a year ago and the $1.8 billion for the consensus Street estimate. 

For the most recent fiscal year, the retailer generated adjusted earnings of $2.87 per share on revenues of $6.51 billion, growth of about 12% and 5%, respectively. Baring any unusual consumer events, Foot Locker should bring in $6.85 billion in sales for fiscal 2015, ending January 31 and given a net profit margin of 7% – about equal to last year – earnings per share is expected in the $3.22 – $3.25 range and $3.55 – $3.65 is a good bet for fiscal 2016. With these 2015 estimates, a forward price-earnings ratio for FL would be 15.1 and reasonable given the company’s above-average growth potential. The company has total long-term debt of about $136 million and a solid financial rating from Standard & Poor’s and Value Line. While retail outfits such as Foot Locker tend to be volatile and subject to the changing whims of consumers, I have tended to keep my distance. And finding stocks with attractive valuations has become increasingly difficult, especially within the consumer discretionary sector. But I believe this choice has strong growth prospects at a sensible price and supports a well-covered dividend yielding 1.8% at current levels and, therefore, deserves a place on the aggressive list.


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