An increasing focus on improving the customer experience and differentiating itself from peers could lead to a successful recovery for Foot Locker (FL, Financial)'s stock price.
Having fallen 26% in the last year, it could be jolted by the impact of an improved shopping experience, as well as the rollout of its loyalty program.
Although tariffs pose a threat to the wider industry, the company’s focus on a broader customer base and improving efficiency may boost its financial outlook.
With a low valuation that suggests it has a wide margin of safety, the stock appears to have investment appeal.
Investing in the customer experience
The company’s increasing focus on enhancing the customer experience could improve its competitive advantage. A key part of this is the expected roll out of its new membership program, FLX, during the current fiscal year. After a successful period following release at Lady Foot Locker in the U.S. and Foot Locker Netherlands, the program is expected to motivate customers to stay within the company’s portfolio of banners through being offered relevant experiences and benefits. The loyalty program will also provide a wealth of data that can be used to offer an increasingly customised customer experience.
Foot Locker is also introducing a number of new features to improve the shopping experience. For example, in the most recent quarter it rolled out a reservation app. This creates a more convenient customer experience during product launches and removes the need to stand in line at stores. It should also free up staff time so they can focus on providing improved service to customers.
Focusing on differentiation
The company is seeking to better connect with its range of customers in order to differentiate itself from peers. Part of this is focused on its Power Store concept, which provides special activation spaces, localized products, and dedicated women’s and children’s spaces. Over 12 Power Stores are expected to be opened in the current year. It also plans to open 15 new stores in Asia, focused on offering a broad range of products to encourage family shopping.
Alongside Power Stores, Foot Locker is investing in creating innovative local experiences that resonate with consumers. For example, its mobile House of Hoops Courtside concept brought workshops with NBA players to customers at the NBA All-Star Weekend in Charlotte in the most recent quarter, with the same concept also being used in Melbourne.
It is further increasing investment in its women’s offering in order to resonate with a wider range of consumers. For example, in the most recent quarter it partnered with female social media influencers and creators.
Threats
The uncertain outlook for the U.S. retail segment could cause short-term challenges for the business. Higher tariffs on imports from China may lead to price rises across the footwear sector. The tariffs are estimated to be as much as $7 billion and are expected to be passed on to consumers in the form of higher prices. This could put retail sales growth under pressure after a volatile nine-month period that has seen them rise just 0.1% per month on average.
In response, the company is seeking to become increasingly efficient. A key part of this is improving inventory management, being in the process of rolling out RFID (radio-frequency identification) technology in its European stores. This will automatically identify and track inventory, and could lead to better product availability. It should also free-up time for staff to serve customers, rather than to organize inventory.
In addition, the company installed a new point-of-sale software solution to its U.S. stores in the last year. This will help to more easily capture data in order to boost productivity and provide more accurately targeted offers in future.
Outlook
In the current year, Foot Locker is forecasted to record a rise in earnings per share of 5%. This is due to be followed by growth of 8% next year. Since the stock trades on a price-earnings ratio of 8.8, it seems to offer a wide margin of safety given its growth outlook.
With a focus on improving the customer experience and differentiating itself from peers, the company could enjoy an increasing competitive advantage.
Having underperformed the S&P 500 by 30% in the last year, the stock could deliver capital growth over the long run.
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