Core thesis: Footlocker is undervalued at a mere 13X NTM Consensus EPS. This long term compounder is on the right side of a secular trend in athletic spending, sports an under-levered balance sheet with a net cash position of +$700MM, a 1.5% dividend, double digits earnings growth, a share buyback and, most importantly for a brick and mortar store, a moat against Amazon (and online spending) due to its reliance on footwear. Unlike many other categories, most consumers feel the need to buy shoes physically in a store, due to its comfort factor that affects their day to day life. A high teens multiple is a better reflection of the dynamics of the business, which will ultimately be realized through the financial performance of the company (earnings growth, free cash flow generation, stock buybacks) and a better valuation for brick and mortar stores more broadly.
Key points:
1) The business model is working. Revenues grew SSS were up 4.7% (constant currency) last quarter, Revenues grew 5.5% in Constant Currency, EPS grew 13% YoY, free cash flow is strong and is being allocated to a nice 1.5% dividend and share buybacks.
2) Footlocker it is on the right side of the big long term trends towards increased spending on athletic gear.
3) Unlike many brick and mortar stores, Footlocker is significantly more immune to the move towards online spending due to the merchandise it sells: Footwear. People still prefer to buy shoes in brick and mortar stores, due to the comfort element of day to day wear. It is risky to buy shoes online, because (as we all know), our theoretical "foot size" rarely translates in terms of the size of shoes we often buy. 1/2 a size up or down can make a huge difference from a comfort perspective. And typically, we also want to take a "walk" in the shoe (akin to a test drive) before we buy the goods.
(Note: Now there is a long term opportunity here for a tech company to introduce foot measuring software, so you can browse for shoes online, use their technology to "measure" you foot, and then custom order a shoe online. But until that kind of software comes alone, Footlocker is one of the few brick and mortar stores that remain somewhat immune from the shift to online shopping.)
4) Given its competitive profile, free cash flow profile (+$600MM in 2018) and long term earnings potential, under-levered balance sheet (net cash of +$700MM), Footlocker is arguably undervalued at a $9.4b market cap and a mere 13X Next Twelve Months (NTM) consensus earnings.
A description of the company:
"Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates through two segments: Athletic Stores and Direct-to-Customers. The Company's Athletic Stores segment is an athletic footwear and apparel retailer whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, SIX:02, Runners Point Group, including Runners Point and Sidestep. The Company's Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and its international e-commerce businesses, which sell to customers through their Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the Websites for eastbay.com, final-score.com, eastbayteamsales.com, and sp24.com. It operates over 3,383 primarily mall-based stores in the United States, Canada, Europe, Australia and New Zealand. The Company operates over 60 franchised stores that are located in the Middle East, Germany and Switzerland, and Republic of Korea."
Key points:
1) The business model is working. Revenues grew SSS were up 4.7% (constant currency) last quarter, Revenues grew 5.5% in Constant Currency, EPS grew 13% YoY, free cash flow is strong and is being allocated to a nice 1.5% dividend and share buybacks.
2) Footlocker it is on the right side of the big long term trends towards increased spending on athletic gear.
3) Unlike many brick and mortar stores, Footlocker is significantly more immune to the move towards online spending due to the merchandise it sells: Footwear. People still prefer to buy shoes in brick and mortar stores, due to the comfort element of day to day wear. It is risky to buy shoes online, because (as we all know), our theoretical "foot size" rarely translates in terms of the size of shoes we often buy. 1/2 a size up or down can make a huge difference from a comfort perspective. And typically, we also want to take a "walk" in the shoe (akin to a test drive) before we buy the goods.
(Note: Now there is a long term opportunity here for a tech company to introduce foot measuring software, so you can browse for shoes online, use their technology to "measure" you foot, and then custom order a shoe online. But until that kind of software comes alone, Footlocker is one of the few brick and mortar stores that remain somewhat immune from the shift to online shopping.)
4) Given its competitive profile, free cash flow profile (+$600MM in 2018) and long term earnings potential, under-levered balance sheet (net cash of +$700MM), Footlocker is arguably undervalued at a $9.4b market cap and a mere 13X Next Twelve Months (NTM) consensus earnings.
A description of the company:
"Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates through two segments: Athletic Stores and Direct-to-Customers. The Company's Athletic Stores segment is an athletic footwear and apparel retailer whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, SIX:02, Runners Point Group, including Runners Point and Sidestep. The Company's Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, including Eastbay, Inc., and its international e-commerce businesses, which sell to customers through their Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the Websites for eastbay.com, final-score.com, eastbayteamsales.com, and sp24.com. It operates over 3,383 primarily mall-based stores in the United States, Canada, Europe, Australia and New Zealand. The Company operates over 60 franchised stores that are located in the Middle East, Germany and Switzerland, and Republic of Korea."
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