This Leading Shoe Retailer Has Good Years Ahead

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

Foot Locker (NYSE: FL) wants to become the world’s leader in athletic shoes and apparel, and currently has about 3,400 stores in 23 countries.  Since hitting a low of $3.65 per share in 2009, when everything in the retail sector was being treated like it was about to go bankrupt, the stock has rebounded tremendously to the $35 or so that it trades for currently.  Although I think it would be prudent for investors to take at least some of their profits off of the table, I believe this company still has some good growth ahead of it.

Foot Locker operates stores under the brand names of Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and CCS.  Foot Locker also does a substantial direct-to-customer business through its websites with the same names, as well as Eastbay, which is a leading direct marketer of athletic merchandise to high school athletes.

Foot Locker’s major supplier is Nike (NYSE: NKE), which provides over 60% of the company’s products.  This can be a positive and a negative for Foot Locker.  It is a positive because this close relationship allows Foot Locker to showcase the latest Nike products that their customers want.  On the negative side, because Foot Locker is so dependent on Nike for its product offerings, it is really at Nike’s mercy when negotiating contracts and pricing.  This is good for Nike (which tends to have the upper hand with all of its distribution channels, making it a good investment itself), but negative for Foot Locker. 

The company expects its forward growth to come from a further differentiation between its different stores, and development of their own apparel lines to complement the branded products they sell.  The company also plans to improve their direct-to-customer sales via investing in mobile commerce sites and social media.

Foot Locker has also proven itself committed to returning capital to its shareholders, with both share buybacks and dividends.  The company has begun reducing the amount of outstanding shares over the past couple of years, and since 2011 has reduced the total number of shares from 156.7 million to 150.7 million. 

As far as the dividend goes, the company has a very nice trend of dividend increases, and did not reduce their dividend once, even when the shares were below $4.  That means that in 2009, at the lows, Foot Locker was yielding over 16%. Wow! 

Valuation/Competition

One of the main reasons I like Foot Locker right now is its relatively cheap valuation and its projected forward growth. Even after the amazing run the stock has had, it still only trades for 13.6 times current year earnings, which are expected to be $2.56 per share when the company reports on Feb. 26. The company is expected to grow its earnings to $2.84 and $3.14 over the next two years, for an average forward growth rate of 10.7%, which is very high for such a low P/E multiple. 

For comparison’s sake, let’s take a quick look at two of Foot Locker’s rivals, Finish Line (NASDAQ: FINL) and Shoe Carnival (NASDAQ: SCVL).

Finish Line is a significantly smaller company, with 637 stores in the United States and none internationally.  Finish Line currently trades at just 12.2 times earnings; however the company’s earnings are expected to decline in 2013, before rising in 2014 and 2015, with an average earnings growth rate of 7.2%. 

Shoe Carnival is not exactly a direct competitor since the company does not focus on athletic shoes.  However, the company does a substantial athletic shoe business, and as a discounter, tends to benefit from bargain-hunters during uncertain economic times. 

Shoe Carnival actually looks like a very well-priced investment, trading at 14.1 times earnings with a very nice forward growth rate of 16.5% projected.  However, as a smaller company there is more risk involved than with Foot Locker.  While this valuation looks very cheap, I am extremely skeptical that they will be able to actually deliver on the projected growth rate.

Conclusion/Target

I believe that as long as Foot Locker works to keep up with the changing retail environment (i.e., increased online presence, mobile sales, etc.), they should have no problems growing as projected.  Assuming their P/E ratio remains the same (which I believe is rather conservative), I think this will be a $39 stock in a year, or about 17% above the current level.


KWMatt82 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!

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