Buy This Retailer Before Earnings?
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
On Mar. 8 Foot Locker (NYSE: FL) will report earnings. Investors are looking for an EPS of between $0.72 and $0.74. Over the past 9 earnings releases, Foot Locker has beaten the estimates (on the EPS side) by over 32% on average. Analysts are very bullish on Foot Locker, with 13 out of 14 analysts on Wall Street giving it a buy rating (which includes UBS and Deutsche Bank). Sterne Agee recently released a recommendation to buy shares of Foot Locker before earnings because they think Foot Locker will beat expectations. The question is, should you buy Foot Locker before earnings?
History and Products
Over the past 9 quarters Foot Locker has handily beaten expectations, and theoretically should be able to beat next quarter’s expectations as well. Foot Locker sells a lot of Nike (NYSE: NKE) products, especially its shoes. Over the past 2 quarters Nike has beaten expectations, with the latest earnings release at December 20, 2012. Nike has grown its EPS by 10% over the past 5 years and its revenue by 8.1% over that same time period. Nike is expected to grow its EPS by 14% this year, which is good news for Foot Locker because they sell a lot of Nike products in their stores and clearly there is a lot of demand for Nike products right now. As long as demand for shoes and other sport apparel remains strong, Foot Locker has a lot to gain. Foot Locker gets 50% of its revenue from Nike products, which has enabled it to form a strong partnership with the apparel maker, but it also makes it very dependent on Nike's products being popular. Right now Nike is doing very well, so expect those gains to roll over to Foot Locker. It's top 5 brands account for 80% of total revenue.
Foot Locker had $853 million in cash and $133 million in total debt at the end of its latest quarter. Add that to the $1.24 billion in inventory it has and Foot Locker's cash position looks very strong. Foot Locker recently raised its dividend up to $0.20 per share and expanded its buyback program to $600 million over the next 3 years. That is an increase of 11% for the dividend and added an extra $200 million to the buyback program. Management has a good track record of returning cash to shareholders through various means.
They trade at a PE of 14.1 (versus a 5 year average of 24.4), 0.85 sales (as of last quarter), and are expected to grow by 12% over the next few years. I would say this company is fairly cheap and should see its PE go up to 16-18 if it keeps beating earnings. PE expansion and earnings beats would lead this stock to over $40 a share.
In 2006 Foot Lockers margins tanked, so management shut down failing stores. This led to them closing 208 stores from 2006 to 2008, making their company more efficient. Not only does management want to give cash back to shareholders, but they are also willing to streamline their business to keep margins up. Their management team is able to react to changing market conditions, which is very important in retail.
Based on Foot Locker's past performance, management's goal to boost shareholder returns, the popularity of Nike (which is 50% of their sales), and that it is a shareholder friendly company, Foot Locker looks like a buy before earnings. Sterne Agee also said they expect Foot Locker to take away market share from Finish Line, which bodes very well for Foot Locker in the long term. Foot Locker caters to those who want to spend a lot of money on expensive athletic foot wear, the kind that most big-box retailers don't sell. This enables Foot Locker to not have to compete with Wal-Mart and Target directly, and enables itself to survive in the niche market. I'm bullish on Foot Locker.
callumturcan has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!