Foot Locker Inc. (FL, Financial) shed $1.79 billion in market capitalization Friday after its shares fell (-)27.9% following release of its second-quarter results. In the first half, the footwear company reported (-)1.7% year-over-year revenue decline to $3.7 billion and a far worse (-)27.4% drop in profits to $231 million resulting in a 6.2% margin compared to 8.4% a year earlier.
The company’s cost of sales increased by 1.4% while SG&A (sales, general and administration) declined by (-)0.1%. Nonetheless, Foot Locker recognized a $50 million litigation charge in relation to a conversion of its pension plan in 1996. Having excluded this charge, the company may have delivered a narrower albeit still double-digit percentage decline in the period.
"Sales of some recent top styles fell well short of our expectations and impacted this quarter's results. At the same time, we were affected by the limited availability of innovative new products in the market. We believe these industry dynamics will persist through 2017, and we expect comparable sales to be down 3% to 4% over the remainder of the year.
"We are obviously disappointed in the results for the quarter, and our team is working quickly to adjust our operations to a changed retail landscape in which we are seeing our consumers move faster than ever from one source of inspiration or influence to another. In addition to working with our vendor partners to identify and capture new trends faster, we are also evaluating a realignment of our capital expenditure priorities and additional expense reductions so we can regain our momentum on both the top and bottom lines and deliver long-term value for our shareholders." –Â Richard Johnson, chairman and CEO
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Valuations
After losing nearly one-third of its capitalization, Foot Locker is currently undervalued compared to peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 7 times vs. the industry median of 20.1 times, a price-book (P/B) ratio of 1.6 times vs. 1.7 times and a price-sales (P/S) ratio of 0.6 times vs. 1.1 times.
Foot Locker also had a trailing 3.22% dividend yield and 23% payout ratio.
Average fiscal 2018 revenue and earnings-per-share estimates indicated forward multiples of 0.56 and 6.8 times.
Total returns
Foot Locker has returned (-)50.24% total losses so far this year compared to the Standard & Poor's 500 index’s 9.96%.
Foot Locker
Foot Locker, incorporated in 1989, is a leading global retailer of athletically inspired shoes and apparel, operating 3,363 primarily mall-based stores as well as stores in high-traffic urban retail areas in the U.S., Canada, Europe, Australia and New Zealand as of January.
In fiscal 2017, 71.6% of Foot Locker’s revenue was generated in the U.S.
The company also maintains a website.
The Foot Locker brand is one of the most widely recognized names in the markets in which the company operates, epitomizing premium quality for the active lifestyle customer. This brand equity has aided Foot Locker’s ability to successfully develop and increase its portfolio of complementary retail store formats, such as Lady Foot Locker and Kids Foot Locker, as well as Footlocker.com, its direct-to-customer business.
Foot Locker, through its subsidiaries, operates in two reportable segments – Athletic Stores and Direct-to-Customers.
Athletic Stores
The Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, with formats that include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep and SIX:02.
First-half figures were not available at the time of writing. Nonetheless, Athletic stores fell (-)0.7% year over year in the first quarter to $1.72 billion (86% of sales) and had an operating margin of 14% compared to 16% a year earlier.
Direct-to-Customers
The Direct-to-Customers segment includes Footlocker.com and other affiliates, including Eastbay Inc. and international ecommerce businesses, which sell to customers through their internet and mobile sites and catalogs.
No figures were derived in the first half, but first-quarter results indicated that revenue in Direct-to-Customers grew 10.7% to $279 million and generated margins of 15% (same profitability compared to its year-earlier results).
Comparable sales
(Company filings)
Comparable store sales relate to sales of stores that were open at the period end and had been open for more than one year. The computation of comparable-store sales also includes the sales of the Direct-to-Customers segment.
In the first half, comparable figures decreased to (-)2.6% compared to 3.7% gains a year earlier.
Sales and profits
In the past three years, Foot Locker had sales growth average of 10.12%, profit growth average 7.6% and profit margin average of 5.32%.
Cash, debt and book value
As of July, Foot Locker had $1.04 billion in cash and cash equivalents and $126 million in debt with debt-equity ratio 0.04 times compared to 0.05 times a year earlier. Overall debt declined by $2 million year over year while equity increased by $316 million.
Foot Locker has negligible goodwill elements in its $3.95 billion assets while book value increased 12.3% year over year to $2.89 billion.
The cash flow summary*
In the past three years, Foot Locker allocated $684 million in capital expenditures, raised $124 million in stock issuance, repaid $8 million in debt, generated $1.59 billion in free cash flow, and provided $1.57 billion in dividends and share repurchases at an average free cash flow payout ratio 98.7%.
*Recent 8-k filing did not contain cash flow statement.
Conclusion
Nearly eight months ago when Foot Locker was gracing its one-year highs at $73.68 that time while analysts still saw some further upside to $80. Significant market disfavor has enveloped the footwear company’s share price has fallen more than half at (-)53.34% since.
Further, contrary to what Foot Locker has achieved in terms of a critical metric –Â comparable store sales –Â the company now expects a negative figure in the range of (-)3% and (-)4%.
In addition, Foot Locker explained that it “will continue to vigorously defend itself in this case” in reference to its now accrued $150 million charges in relation to its ongoing pension plan litigation. As a result, this could further dampen its profits in the succeeding quarterly results.
Nonetheless, Foot Locker has maintained a pristine balance sheet while having provided generous payouts to its shareholders in recent years.
Average analysts have an overweight recommendation on Foot Locker with a target price of $64.75 a share. This target price may still be prone to adjustments as the footwear company has just warned that it will see sales losses this fiscal year.
In summary, Foot Locker is a pass.
Disclosure: I do not have shares in any of the companies mentioned.
