I Should Be Shoved in a Locker
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I like to read Motley Fool articles to see what other investors think of companies that I follow. Many times I agree with the article, but sometimes I completely disagree. In those cases, a lot of times the idea makes it into this blog.
In particular, the Fool's Sean Williams and I have had our differences of opinion. In multiple cases, I went as far as to pick his article apart to try to show why I thought differently. However, in his recent article about Foot Locker (NYSE: FL), I was the one proven wrong. I've even questioned in the past the value of Foot Locker versus newer competitors such as Dick's Sporting Goods (NYSE: DKS). I'm willing to accept when I make a bad call and in order to avoid other investors making my same mistake, let me show you what's going on at Foot Locker that might make this stock a good investment.
One primary difference between Foot Locker today, versus years ago, is the advent of new highly competitive sporting goods brands. In particular, new companies to the space such as Under Armor (NYSE: UA) bring new growth, and expanded products to Foot Locker stores. These new entrants into the field also calls existing companies such as Nike (NYSE: NKE) to improve their product selection, and innovate in new ways. The combination of these factors, as well as intelligent decisions by management, is what causes Foot Locker to be a better deal today than it would have been in the past.
Some of the management decisions that have been made in the last few years, are new cost controls and changes in the way the company does business. In his article, Sean points out that the company has been closing underperforming stores, and remodeling older stores. Both of these actions, were sorely needed, as Foot Locker's stores have been some of the longest standing retailers, in many malls across the country. An additional positive factor for the company is, they have been able to pass along the rising cost of raw materials, because of their improved store image. If there is any question about Foot Locker's capability to grow, one only needs to look at the last four quarters of financial performance.
When I compared Foot Locker's performance to other companies I've followed in the past, I was actually shocked at the quality of earnings growth. First, the company has sequential revenue growth over the last four quarters. In the same timeframe, the company also beat analysts expectations every single quarter. Additionally, the gross margin has improved from 30% in July 2011, to 32% between October and January, and in the most recent quarter it improved again to 34%. When you look at the company's longer-term performance, the growth in net income and cash flow in the last three years, is equally impressive. Foot Locker has seen net income growth of over 400%, operating cash flow growth of over 40%, and free cash flow growth of over 30%. Last but not least, the company grew its cash balance by 46% in the last three years, and has cut long-term debt each year. Beyond remodeling their stores, and closing underperforming stores, what can help Foot Locker grow in the future?
Probably the most significant driver will be the brands that Foot Locker sells. Just as an example, Nike is expected to see nearly 12% earnings-per-share growth in the next five years. The company is also generating significant cash, as seen by the fact that in the most recent quarter the company generated over $200 million in free cash flow. Another example would be the aforementioned Under Armor, which is expected to see earnings-per-share growth of almost 22% in the next five years. The company is also generating cash, as evidenced by the current quarter adjusted free cash flow of $16.4 million. With companies like these driving innovation, and constantly introducing new product lines, Foot Locker and the industry overall, should see good growth going forward.
As proof that not only Foot Locker will benefit, one could also look at Finish Line (NASDAQ: FINL), which is a direct competitor, as well as the numbers for Dick's. In the next five years, Foot Locker is expected to grow earnings by 14.45%, Finish Line is expected to grow by 14.56%, and Dick's is expected to see 15.46% growth in earnings as well. If there is one significant difference between the three companies, it is Foot Locker's dividend payment. While both Dick's and Finish Line pay dividends of about 1%, Foot Locker's dividend is 2.28% currently. Given the improvement in gross margin, store appearance, free cash flow growth, and balance sheet, it's easy to see why Foot Locker could be a good investment. This is a prime example where, my mistake was assuming that I knew more about a company than the research shows. Don't make the same mistake, and be sure to keep up with developments by adding Foot Locker to your Watchlist today.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Dick's Sporting Goods, Nike, and Under Armour. Motley Fool newsletter services recommend Nike and Under Armour. 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.If you have questions about this post or the Fool’s blog network, click here for information.