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Is Foot Locker Ready to Run Higher?

Tuesday, March 6th, 2018

With large pullbacks in the retail industry, we continue to believe there are opportunities for investors to have great gains over the next few years. Many retailers have come off their 52-week lows but are still well off where they were a couple of years ago and many present great value opportunities. In this industry, it is also important to investigate the company’s strategy for a changing retail environment and how they are handling the shift to a more digital experience.

One company with a good name and strong fundamentals is Foot Locker (FL). The company sells apparel, accessories, equipment, and footwear through 3,349 stores in North America, Europe, New Zealand, and Australia. It also sells its products and team licensed merchandise for high school and other athletes through the internet, mobile sites and catalogs. I would be interested in finding out the company’s total sales through its online platforms before investing in it.

Last week the company reported sales which missed estimates and issued weaker guidance than anticipated. This sent the stock price tumbling nearly 13% for the day. While the sales miss may sound concerning, it is important to remember that companies are going to report down quarters and even down years. An investor needs to focus on the long-term prospects of the business and not the daily or even quarterly fluctuations. Foot Locker now trades at $41.75, which is well off it’s 52-week high of $77.86.

Simply because a company has a decline in its stock price does not mean it now presents a value opportunity. It is always important to find out how much you are paying for the various aspects of a business. The current Price/Earnings of 14.0 is favorable to the industry average of 25.5. Price/Sales of 0.6 is below the industry average of 1.1. Price/Tangible Book Value of 2.0 is better than the industry average of 6.9 and Price/Cash Flow of 9.1 is also less expensive than the industry average of 9.3.

With the decline in the stock price, Foot Locker now pays an attractive dividend of 3.3%. The company only uses 31.3% of its earnings to pay out that dividend. This provides me with a lot of confidence that the dividend is sustainable and could even see an increase over the coming years. We also like to look at the cash flow statement when analyzing a company’s dividend. If we look at the first 3 quarters of the fiscal year, Foot Locker had cash from operations of $496 million, and the dividend only used $120 million in cash. This is a positive as the company was able to use excess cash on capital expenditures and buying back stock.

Over the last 12 months, sales have seen an increase of 0.21%, but EPS has fallen 39.7%. Many companies have seen drastic fluctuations in earnings due to accounting practices and the recent corporate tax reform. It is important to research how the tax changes will impact Foot Locker and if that was the cause of EPS has declined.

Turning to the balance sheet, a current ratio of 4.1 compares favorably to the industry average of 2.1 and shows the company has liquidity. It is almost too much liquidity, I would like to know why the company has so much in short term assets. Total Debt/Equity of 5.0% is also better than the industry average of 55.7%.

Looking forward to January 2020 and using a forward multiple of 16.5, estimated GAAP EPS of $4.65 gives us a target sell price of $76.73. This would be an estimated return of 83.8%, which would place the company in our buy range. This company has many great fundamentals and would be worthwhile to conduct further research.

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