Which of These Sportswear Retailers Will Fit Your Portfolio?

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

Shoes and clothes need replacement on a consistent basis, even more so for the sportswear segment as these are more subjected to wear and tear. And to top that, kids’ shoes and apparels need the most replacement as kids grow very fast (trust me!) and the older stuff no longer fits their body. So it is clear that the sportswear business has a recurring nature poised to grow in good times and bad.

People today are getting more health conscience and the global sportswear industry is expected to generate additional $55 billion in new sales by 2017 so I guess it wouldn’t hurt to look for companies in this segment which promise a steady and positive growth over the long term.

Foot Locker (NYSE: FL) is one such company which is in an impeccable position right now with a robust balance sheet, steadily growing business along with improving profit margins. The company sells name-brand athletic apparels and shoes from a variety of manufacturers with over 3,000 stores spread across 23 countries. Advantage of choosing a retail chain like Foot Locker over brands like Nike or Adidas is that these brands are exposed to changing consumer preferences whereas Foot Locker sells all the brands under one roof so it is always going to find customers not bothered by the change in consumer tastes.

Robust same-stores sales growth and improving margins.

One feature which particularly interests me is Foot Locker’s steady same-stores sales growth. Management pays special attention to the under-performing stores and fast decisions are made as to whether they need to be renovated or closed.

For the latest quarter, 25 new stores were opened, 64 were renovated/relocated and 39 poor performing stores were closed and management plans to close 88 stores this quarter making way for 73 new stores. This close monitoring led revenue for fiscal 2012 rise 10% aided by the 9.4% same-stores sales growth. It’s a huge positive for retail investors as it is important in the retail industry that the non-performing stores shouldn’t burden the top-line growth.

Here’s a brief from the company’s annual 10-K filings.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                       

Square Footage

   

January 28, 2012

 

Opened

 

Closed

 

February 2, 2013

 

Relocations/Remodels

 

(in thousands)

                       

Selling

 

Gross

Foot Locker US

   

1,118

     

9

     

55

     

1,072

     

58

     

2,515

     

4,311

 

Foot Locker Europe

   

561

     

39

     

10

     

590

     

41

     

808

     

1,770

 

Foot Locker Canada

   

129

     

2

     

2

     

129

     

9

     

264

     

406

 

Foot Locker Asia Pacific

   

91

     

3

     

2

     

92

     

5

     

128

     

206

 

Lady Foot Locker

   

331

     

1

     

29

     

303

     

17

     

398

     

685

 

Kids Foot Locker

   

291

     

18

     

4

     

305

     

13

     

421

     

727

 

Footaction

   

292

     

1

     

10

     

283

     

18

     

817

     

1,299

 

Champs Sports

   

534

     

12

     

7

     

539

     

37

     

1,876

     

2,861

 

CCS

   

22

     

     

     

22

     

     

34

     

51

 

Total

   

3,369

     

85

     

119

     

3,335

     

198

     

7,261

     

12,316

 

The company’s profitability is one the rise with EBIT increasing an impressive 130% on the back of 20.83% rise in revenue during the 2010-2012 period and the gross, operating and net margin all are above the five-year average.

 

 

 

 

 

 

 

 

 

   

2012

 

2011

 

2010

 

Long-term Objectives

Sales (in millions) (1)

 

$

6,101

   

$

5,623

   

$

5,049

   

$

7,500

 

Sales per gross square foot

 

$

443

   

$

406

     

360

   

$

500

 

EBIT margin (1)

   

9.9

%

   

7.9

%

   

5.4

%

   

11.0

%

Net income margin (1)

   

6.2

%

   

5.0

%

   

3.4

%

   

7.0

%

ROIC (1)

   

14.2

%

   

11.8

%

   

8.3

%

   

14.0

%

 

TTM

5 Year Average

Gross Margin

44%

42.6%

Operating Margin

10.2%

5.8%

Net Margin

6.5%

2.8%

                                       

Going strong in Europe

Foot Locker recently agreed to buy German athletic chain Runners Point for $94 million to strengthen its foothold in Europe. Runners Point operates over 200 stores throughout Germany and other European nations along with an online subsidiary, Tredex and recorded recorded sales of $254 million in 2012. Foot Locker aims to capitalize on Tradex’s strong digital presence to accelerate growth in its own developing e-commerce business in Europe.

Strong balance sheet

In today’s volatile market I think it is important to select companies with a healthy dividend and repurchase programs so the invested capital at least generates a healthy income even if economic conditions change against the company for a while.

Foot Locker pays an attractive 2.4% dividend yield which turns out to be roughly $120 million annually. With over $1.1 billion in cash and cash-equivalents, annual free cash flow of $250 million and just $130 million in debt, dividends should keep coming into the investors’ pockets keeping your account balance increasing!

Earnings estimate

The consensus estimates are for EPS to grow to $2.82 in the current year from $2.56 last year (~10% growth). Analysts expect revenue to increase by $0.2 billion this year to reach $6.4 billion, in line with the guidance the company provided on its first quarter earnings call.

Cheap valuations

With such strong growth prospects, an impressive same-store growth rate, positive earnings expectations, and a good management in place, the company deserves premium valuations. But that’s not the case here as Foot Locker is currently trading at a P/E of 13.47 which is very close to its lowest levels in the past five years. Even if the company continues to grow at the current pace, it could very well reap healthy returns for the investors if they get in early.

The Barcelona FC sponsor is also running fast!

Another company growing at an accelerated pace is Nike (NYSE: NKE) world’s largest sportswear manufacturer. After all being the official sponsor of the Barcelona FC and the 2014 FIFA World Cup isn’t cheap.

Fiscal 2012 was another good year for the athletic-apparel juggernaut, as revenue rose 8% to $25.3 billion and earnings rose 11% to $2.69. Like Foot Locker, Nike too is an investor-friendly company with a healthy dividend yield of 1.30% and constant share repurchase programs. Last year the company spent $1.7 billion in share buy backs and now has a four-year $8 billion repurchase program.

One of the key issues concerning the company is its continuous fall in Greater China. Between 2006-2012 sportswear market has had a compound growth rate of 29% every year whereas Nike’s sales in the country have been declining for three consecutive quarters.

Taking the pie away from Nike is Adidas (NASDAQOTH: ADDYY) With an 11.2% market share in China, Adidas is going pretty strong here, with sales in Greater China increasing 6% for the first quarter of 2013. Adidas group CEO Herbert Hainer too thinks that the brand is growing faster than its peers and could very soon be the market leader in the country.

Adidas is going all guns in the 2014 FIFA World Cup and sales from its soccer division are expected cross $2.7 billion for the first time in 2014.

Revenue at Reebok’s CrossFit range increased 13% for the first quarter of 2013.Adidas’ has come out with a new branding strategy for its Reebok line which it acquired in 2006, and if the campaign takes off then Reebok’s extremely successful CrossFit segment could give a good boost to the company’s growth.

Conclusion

Foot Locker has a lot of positives going for it. Company is driving profitability in an efficient manner, same-stores growth driving revenue and close down of under-performing stores removing the road blocks to growth. The recurring business model makes it less vulnerable to economic volatility and having major brands under its roof removes the difficulties arising due to change in consumer preferences. The balance sheet is robust; company has an appealing dividend and buy-back program, and very cheap valuations. I think this company will be a good fit for your portfolio. 

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Tushar Agarwal 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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