Foot Locker (FL, Financial) stock was down 27% Friday on reports that, while total store count rose to 3,359, comparable-store sales fell 6% in the second quarter, sales decreased 4.3% for the quarter, gross margins fell 340 basis points to 29.6%, and SG&A expenses increased to 19.9%.
Top money managers George Soros, Joel Greenblatt, Jeremy Grantham, Paul Tudor Jones and Ray Dalio have tiptoed into the stock, but will any of them see this move down as a big buying opportunity? If you bought in at $48 and still believe in the long-term growth and value the company brings to the table, then buying at a 26% discount should be an easy decision.
Say that a company like Foot Locker fails. It wouldn’t be just a reflection of brick-and-mortar retail. It would mean that the entire economy is too expensive, which could be true. Of course, for decades, the debate has been whether top brands would be better off going direct to consumers instead of through third parties' retail distribution. That is easier than ever thanks to the internet, yet we live in a world where shoe and clothing brands rely heavily on retailers, both through physical stores and e-commerce.
There are so many ways that Foot Locker can utilize its current locations to drive both online and in-store performance. The question is whether it will pivot and evolve or not. Thankfully, the company will be able to handle short-term pressure because of its super strong financial position.
Total cash stands at $1.05 billion, total debt is at $127 million, dividend yield is 2.45%, and it has a market value of $4.6 billion. Historically this quarter is the lowest of the year, and the company could still earn over $4 per share this year. Return on equity, assets and invested capital are all extremely high, each hovering around 20%.
Economics 101 would lead us to believe that as demand for physical locations lessens, the price per square foot will drop, leases will get cheaper, and Foot Locker will be in a good position to renegotiate terms or buy up smaller competitors. It has the cash and keeps generating even more.
That’s if retail is really going to disappear. It’s funny how quickly fear turns to devastation before anything actually happens. Retailers are still making money. Yes, the industry overextended by building too many locations leading to higher expenses and real estate prices, too. That’s how capitalism works. By no means does it signal death (i.e., total loss) for retail. In the market, when everyone is forming opinions on value based on what company management expects, surprises lead to overreactions too.
Looking ahead, Foot Locker still thinks "innovative" products can boost demand in the second half and into 2018 but doesn’t see vendors selling on Amazon (AMZN, Financial) as a major threat due to their focus on the lower end of the market. Foot Locker continues to stress that consumers still want physical contact with premium shoes in their shopping experience. Given better return policies, consumers tend to choose price and convenience, which is something that, interestingly enough, retail stores do not seem to offer anymore.
The bottom line: If you haven’t bought in yet, waiting might not hurt you. Foot Locker will continue to grow its EPS through share buybacks and slow earnings growth. When that number reaches $6 per share, the stock could have a $90 price tag. If that happens in five years, you beat the market.
Disclosure: I am not long/short any stocks mentioned in this article.
