Expect Growth From This Retailer

Gail is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Foot Locker is getting ready to release their fourth quarter earnings on Friday and I took a look at what we might expect. Analysts are expecting quarterly and annual earnings of $0.72 and $2.56 per share respectively. I believe that estimate is too low. Here’s my thinking:

Overall Efficiency:

Over the past several years, Foot Locker (NYSE: FL) has become a much more efficient company. For example:

  1. Gross margin increased from 27% in 2009 to 30% in 2010 to 32% for YE2011 and 32.7% for the last four quarters.
  2. COGS was 72% in 2009, 70% in 2010, 68% YE2011 and 67% for the last four quarters.
  3. SGA was 22.5% for FY 2009 & 2010, 22.1% for FY2011 and 21% for the last four quarters.
  4. Net Income was 1% for FY2009, 3.3% for FY2010, 4.9% for FY20211, and 6.3% for the last four quarters.
  5. While total income grew by 6% from FY2011 to the last four quarters, COGS grew by only 5%.

I believe that trend will continue overall and Net Income will increase to Foot Locker’s stated goal of 7% of Total Sales in the fourth quarter.

More Sales:

Athletic Store sales increased by 10.7% in FY2011. I believe that trend will be even higher for FY2012 and have estimated an 11% increase. Given the recent upward trend in the Consumer Price Index for Footwear, that may be a very conservative estimate.

Direct-to-Customer sales increased by nearly 19% in FY2011. Given the overall trend of consumers to shop on-line, Foot Locker’s Direct-to-Customer sales will likely continue to increase. In a recent article from Moody’s Investors Service they note “Online sales now exceed 10% of all apparel and footwear sales in the US…” Foot Locker is moving towards that trend with 8.5% of sales coming from online sales in FY2009 and 2010, 9.1% in FY2011, and 9.6% over the past four quarters. I think that percentage will increase over 10% for the fourth quarter.

Some Concerns:

While my overall view of Foot Locker is positive, I did see several items when reviewing its financial statements which have me concerned.

1. Inventory is 16% higher for the MRQ over FY2011. This is troublesome.

2. Accounts Payable has been holding around just under 8% for FY2011 and FY2010, but rose to 10% of total Assets for the MRQ. AP are 36% higher for the MRQ than at the end of FY2011. Days Payables Outstanding has increased from 9 days in FY2010 to 25 days for the MRQ.

Other Footware Companies:

I took a look at two other stocks; Crocs (NASDAQ: CROX) and Finish Line (NASDAQ: FINL).

Crocs: With a current price around $15.30, average expected FY2013 earnings of $1.51, and a PE holding steady at 10.6, Crocs will be trading around $16 per share, a 5% gain. However, a troubling story in the Boulder County Business Report, where Crocs is headquartered, gives me pause. US Customs and the Mexican Tax Authority have both stated that Crocs has underpaid custom & tax payments to the tune of $36 million. Crocs doesn’t specifically deny the report, but does claim that the “amount owed is considerable less.”

Finish Line: Analysts estimate that Finish Line will close out its year with EPS of $1.48, well below the $1.59 reported for last year.

I would not recommend either of these companies.

Bottom Line:

I believe that we’ll see fourth quarter earnings of $0.76 and annual EPS of $2.66. If Foot Locker continues to see a P/E around 15, this would mean a stock price around $40, an increase of 14% from the current price of $35. A move towards the industry average P/E of 20 would bring the price up to around $50.

Gail P. Eddy has no position in any stocks mentioned. The Motley Fool owns shares of Crocs. 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!

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