While the retail industry as a whole is going through major adjustments, one bright spot is Foot Locker (FL, Financial).
The company’s price doesn’t reflect the great job it has done navigating the market conditions for its segment. For one, Foot Locker has always had small very focused stores. People go in and know what they are buying – very little window shopping. Second, the shoe business has continued to garner higher price points thanks to consumers wanting to wear the sneakers professional athletes do. Foot Locker is the Luxottica (LUX, Financial) of shoes in the mall.
I know, mall shopping is a retailer's thorn in the side right now, but people are still going to the mall for shoes and that means shopping at one of Foot Locker’s main stores or subsidiaries like Champs or Footaction. Of course, Foot Locker also has a strong presence online with its own Web site, Lady and Kids Web sites, Eastbay, Footaction, Champs, Runners Point, Sidestep and Six02. All in all, Foot Locker’s online game is solid with close to 20 million followers across its social accounts. I can't say that it has a moat around it, yet it's in the right industry with enough market share to win long term.
In February the company reported:
- Fourth-quarter net income of $189 million, $1.42 per share.
- Fourth-quarter non-GAAP earnings per share rose 18% to $1.37.
- Fourth-quarter comparable-store sales increased 5.0%.
- Annual sales and profit were highest ever as athletic company.
Since 2008, Foot Locker has increased revenue 43% from $5.4 billion to $7.7 billion and net income by more than 14x from $45 million to $653 million while keeping capex under 40% of net income. The company has decreased total shares outstanding by 13% to 134 million, leading to higher EPS, book and dividend figures. It is continuing to grow stronger, which at this price makes it a massive bargain.
Let’s talk turkey for a moment. Foot Locker continues to drive revenue higher while increasing its gross margins. A decade ago, it had 26% gross; now it’s upward of 34% with net margins at 8.4% – that’s huge for retail. Target’s (TGT, Financial) net is 4%, Macy’s (M, Financial) is 2.3%, Walmart (WMT, Financial) is 2.7%, and Costco (COST, Financial) is way down at 2.05%, but speaking of Macy’s, Foot Locker does roughly $100 million more in net income than the retail giant, with far less total equity. In fact, the company’s return on investment capital is higher than Chipotle (CMG, Financial), a company that does less in sales and net profit but has a price tag that’s $5.4 billion more than Foot Locker.
Year to date, stock's down 31%. To me this is a no-brainer, especially now that the stock has flushed out some other big-time money managers like George Soros (Trades, Portfolio) and David Dreman (Trades, Portfolio). Two recent buys were from Leon Cooperman (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio), both of whom take a hardline fundamental approach to the market. Cooperman, a former Goldman Sachs partner, helped create the firm's $1 trillion asset management business and then left to start Omega Advisors in 1991, becoming a billionaire by picking winners over the last 26 years.
I don’t know if they see what I do, but if Foot Locker can continue to push financial progress, sales could reach $10 billion by 2022, at an 8.4% net margin and a normalized earnings multiple, it’ll be a $12.6 billion to $13 billion company. That’s easily good for a double when you kick in that nice 2.56% annual dividend.
Worst case, put 0.50% to 1.0% of your assets in Foot Locker at this price. Long term, you’ll beat the Standard & Poor's 500 at this price.
Disclosure: I have no position in any stocks mentioned in this article but plan on taking a long position in Foot Locker within the next 72 hours.
