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Time to Give Foot Locker Stock a Closer Look

Posted on Thursday, November 14th, 2019 by Chris Markoch

On Nov. 13, Foot Locker (NYSE:FL) stock got a boost when Nike (NYSE:NKE) announced that they will stop selling their shoes on Amazon (NASDAQ:AMZN). FL stock jumped over 2% on the news during the day’s trading session, closing at $46.38. The stock has since given back the gains, but are there other reasons to consider buying Foot Locker stock as the holidays approach.

Nike’s decision was not a surprise to the market

If investors were paying attention, this move by Nike was telegraphed when Foot Locker opened its community-based Power Store in the Washington Heights area of New York City. The 9,000-square-foot store is the first Foot Locker store to feature the Nike App. In addition to allowing shoppers to view their favorite bands on their mobile devices, the Nike app gives consumers all the information they need to know to ensure they get the product they want when they want it.

According to Raymond James analyst Matthew McClintock, Nike’s decision to stop selling on Amazon removes an obstacle that was hanging over Foot Locker stock. “While we never expected marquee product to be sold on AMZN,” said McClintock, “we still believe that the prior NKE/AMZN relationship announcement served as an overhang to FL’s stock valuation that is now removed.”

Foot Locker is taking back the power

2019 marked the debut of Foot Locker Power Stores. These stores are targeted to local communities with exclusive brands and digital technology. Each Power Store showcases local designers, artists, and influencers. In addition to their New York City location, the company currently operates Power Stores in Detroit, Philadelphia, London, Liverpool, and Hong Kong. Currently the company is planning on opening locations in Los Angeles and Vancouver.

The popularity of the Power Store supports Foot Locker’s success in the difficult brick-and-mortar arena. Said McCormick, “We believe FL’s dominant position as the single best physical athletic footwear distribution point in the world is only becoming increasingly more important to NKE’s long-term strategy, particularly given the news that the largest digital distribution network in the world (AMZN) is no longer a factor.”

The proof will be in the earnings report

Foot Locker is scheduled to report third-quarter earnings on November 22. Whisper reports are saying that the company’s earnings per share will come in at $1.10 on revenue of $1.94 billion. This would beat the consensus estimate for an EPS of $1.07.

That would be confirmation that some of the steps Foot Locker is taking are working. Second-quarter earnings for the footwear company were not terrible, but disappointing. Or maybe a better way to say it is that the results didn’t match expectations after the company launched its Power Stores. By virtually every meaningful metric, the company’s performance was down on a year-over-year basis.

 

2Q 2019

2Q 2018

Net Income

$60 Million

$88 Million

Earnings Per Share (EPS)

55 cents

75 cents

Total Sales

$1.77 billion

$1.78 billion

Gross Margin

30.1%

30.2%

Selling, General and Administrative Expenses

22.2%

21.3%

In addition, Foot Locker reported comparable-store sales (a version of same-store sales that combines foot traffic and customer ticket size) was only up 0.8% year-over-year. Investors, perhaps disproportionately, targeted the stock which dropped 19% after the release of the earnings report.

But Foot Locker is continuing to invest in digital capabilities and infrastructure. This, in turn, is allowing the company to reduce its inventory, which, at $1.23 billion was 2.2% lower year-over-year. And the company had $939 million in cash with only $123 million of debt on its balance sheet.

Is Foot Locker a buy?

The fundamental case for the stock is strong. Foot Locker has increased sales by over 10% during the last five years. That is no small feat when you consider all the obstacles that brick-and-mortar stores have faced. The company is maintaining a positive outlook for the rest of 2019. The company is forecasting higher foot traffic that improved from spring to summer. The company is also citing strong growth in its online store which is now 14% of total revenue.

Foot Locker shares are currently trading at a very appealing 7.7 times last year’s earnings. The stock also has an attractive 4.3% dividend yield. When you consider the cash they have on their books, there should be no problem covering this dividend.

Using technical analysis, the stock is showing some potential upside. FL stock is trading below its 50-day simple moving average and its exponential moving average.

Wall Street analysts are also taking an optimistic outlook. The analyst firm, Susquehanna, recently upgraded their rating of FL Stock from neutral to positive. They also increased their price target on Foot Locker shares from 39 cents to 55 cents.

Zacks investment firm is also predicting an earnings beat. However, Foot Locker currently has a Zacks Rank of 3 which indicates a Hold.

Companies Mentioned in This Article

CompanyCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Foot Locker (FL)$37.13flat4.09%7.88Buy$54.63
Nike (NKE)$97.77flat1.00%39.27Buy$98.86
Amazon.com (AMZN)$1,760.94flatN/A87.43Buy$2,192.08

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