1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Ishan Majumdar
Ishan Majumdar
Articles (62) 

Foot Locker: Hold On to This Yield Play

After a couple of bad quarters, the retailer has finally delivered a decent result, stabilizing the stock price as its dividend and buyback yield continues to be phenomenal

November 27, 2019 | About:

The apparel retail industry in the U.S. has not had a great 2019 so far as the majority of the stocks of this sector listed on the New York Stock Exchange are in red. It is likely that investors are being extra cautious before investing in this space. In fact, there is a strong possibility that investments in apparel retail stocks are being re-evaluated especially of companies like Foot Locker (NYSE:FL) whose stock price has taken a beating over the past few months. Foot Locker has been a clear underperformer in terms of its share price after some bad results earlier in the year. However, there is more to this company than meets the eye and a more detailed evaluation indicates that it might not be such a bad investment after all.

Foot Locker & The Story of Its Same-Store Sales Growth

Foot Locker is one of the oldest retailers of shoes, apparel, and accessories in the US. Founded in 1879, the company operates over 3,000 stores across the globe and over 100 franchises in the Middle East and Germany. Foot Locker is headquartered in New York and has tie-ups with all the top sportswear brands including Nike (NYSE:NKE) and Adidas (ADDYY).

Over the years, the company has had its fair share of struggles and the most recent one worth mentioning is its struggle to manage same-store sales. There was a time around 2017-18 when Foot Locker’s same-store sales growth was struggling. Strong efforts on the part of the management to identify and close down underperforming stores, find new locations with better footfall potential to relocate existing stores or even open new stores is the reason why the company has been able to deliver a positive same-store sales growth today. The company’s direct sales to consumers also went up to around 15% of turnover in this quarter. One of the biggest drivers of this turnover is the innovative new launches by its two biggest brands Nike and Adidas. While its problems are still far from over, this is certainly a move in the positive direction for the retail giant.

A Mixed Result And Some Relief For Investors

Foot Locker’s most recent quarterly result was nothing sensational but it did manage to deliver an earnings beat. The company’s revenues of $1.93 billion were slightly below the analyst consensus estimate of $1.94 billion but there was finally a growth in comparable-store sales of around 5.7%. This came as a big relief for investors as the overall top-line was up 3.9% as compared to $1.86 billion in the corresponding quarter of the previous year. One of the key reasons for the top-line performance improvement is the solid performance of Nike Inc. which accounts for more than half of Foot Locker’s total revenues.

In terms of the earnings per share, Foot Locker reported a number of $1.13 which was above the analyst consensus estimate of $1.08. This earnings beat was another big relief for investors who had seen their Foot Locker shares lose more than 20% of their value during the last two bad results where the company had failed to meet expectations on both, the revenues as well as earnings. The company’s free cash flows were up which gave the management a chance to carry out a continue its amazing yield story through buyback and dividends.

It Is All About The Yield

Foot Locker has always been more of a yield play than a growth stock and the management ensured this by continuing its buybacks and dividends. The company bought back 4.6 million shares for $178 million and also release a dividend payout of $41 million. This is a continuation of the $120 million buyback in the previous quarter and the $43 million dividend payout and is one of the major reasons for investors to hold on to the stock.

Year

2014

2015

2016

2017

2018

TTM

Trailing Dividend Yield %

1.53

1.49

1.52

2.57

2.53

3.67

Buyback Yield %

2.64

4.30

4.17

7.34

6.98

6.70

Total Yield %

4.17

5.79

5.69

9.91

9.51

10.37

As shown in the table above, the management’s consistent payouts have resulted in a phenomenal yield of over 9% for the past couple of years which has grown gradually. Today, Foot Locker can be considered a full-fledged yield stock as the average yield for the past twelve months has been as high as 10.37%.

A Further Crash Might Not Take Place After All

Foot Locker is trading at very reasonable valuation multiples. Its current Price to Earnings ratio is as low as 8.75 and its enterprise value-to-revenue multiple is below 1. The company’s debt levels of around $123 million are well in control given the solid cash balance of $744 million, and its operating margin of 9.04% is also above the industry average. These are strong indicators of the fact that Foot Locker has very solid fundamentals.

After two results where the company failed to meet expectations, the management delivered a decent result which is why the stock is comfortably placed around the $40, well above the $37.5 support level and below the $50 resistance level. As long as the stock price does not crash below this support, there is little for investors to worry about, given the strong fundamentals of the company.

Conclusion

When an investor holds on to a yield stock, his biggest concern is the price fluctuation, particularly the destruction of the invested capital caused by any adverse circumstances affecting the fundamental business. A couple of years back, this might have been the case with Foot Locker while its same-store sales were struggling. However, the company has moved beyond that stage. Its inability to meet analyst expectations in the past couple of quarters did result in the stock taking a beating but as of today, it is firmly above the support of $37.5 and might be rangebound with resistance at $50. Meanwhile, investors can put all their worries aside and continue holding on to the stock to enjoy the buyback and dividend yield.

Disclosure: No positions.

Read more here:

Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.

About the author:

Ishan Majumdar
I am a qualified chartered accountant with a masters in management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research specializing in research and valuation of listed companies.

I have over six years' experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

Rating: 0.0/5 (0 votes)

Comments

Please leave your comment:



Performances of the stocks mentioned by Ishan Majumdar


User Generated Screeners


pjmason14Momentum
pascal.van.garsseHigh FCF-M2
kosalmmuse6
kosalmmuseBest one1
DBrizanall 2019Feb26
kosalmmuseBest one
DBrizanall 2019Feb25
kosalmmuseNice
kosalmmusehan
MsDale*52-Week Low
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
/* */