Stock Foot Locker: Bag A 5.3% yield (NYSE: FL)

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The retail industry is somewhat known for being a low-margin business, ranging from grocers like Kroger (KR) to discount retail giant, Walmart (WMT). At the other end of the spectrum, those Retailers that focus on premium products tend to enjoy higher margins and are therefore better positioned in an inflationary environment due to their pricing power.

This article focuses on one such retailer, Foot Locker (NYSE: FL), and explores what makes recent price weakness a potentially good entry point, so let’s get started.

FL: Bag A 5.3% yield

Foot Locker has been in business since 1974 and is an athletic footwear and apparel retailer. The company operates over 3,000 stores in 27 countries, with the vast majority (~85%) located in the United States. Foot Locker derives the vast majority of its revenue and profits from the sale of shoes. Apparel sales make up a much smaller share of total revenue, but have been a growing part of the business in recent years.

Foot Locker maintains healthy margins, as evidenced by its 10% net profit margin, well above the industry median of 6.6%. This earned it a B rating for profitability, as shown below.

Profitability Foot Locker

FL Profitability (Looking for Alpha)

In addition, management seems rather favorable to shareholders with share buybacks. This makes sense, as FL’s operating model is proven and does not require massive reinvestments in the business. This is supported by management’s recent announcement of a new $1.2 billion share buyback program. As shown below, FL has retired an impressive 22.4% of its stock count in the last 5 years alone.

Number of FL shares

Number of FL shares (Looking for Alpha)

FL’s share price has traded rather weakly since February, when news broke that Nike (NKE) was planning a direct-to-consumer model, which seeks to reduce reliance on retailers such as Foot Locker. As shown below, FL’s stock price of $30.40 now sits below its 200- and 50-day moving averages of $45 and $33.60, respectively.

Technical characteristics of FL stock

FL Stock Techniques (Stock charts)

Nike accounted for 70% of Foot Locker’s sales in 2021, and the market is obviously concerned that such a move by Nike will hurt FL sales. Meanwhile, FL has a plan to offset this headwind through product diversification, as it said no vendor will account for more than 55% of total vendor spend as part of its long-term strategic shift.

Additionally, FL’s business is doing well, with revenue growing 6.9% in the fourth quarter and nearly 19% in the recently ended fiscal year, the highest on record. by Foot Locker. This was driven by a strong product mix, with strong growth of 30% in apparel and growth in non-Nike components above 30%. This includes the momentum FL sees around brands such as adidas (OTCQX:ADDYY), PUMA (OTCPK:PMMAF), New Balance, Timberland, UGG and Crocs (CROX).

Looking ahead, management is also addressing concerns about its US mall exposure by embracing non-mall formats, as highlighted in the recent conference call:

Another area is our shift to larger non-mall formats in our rollout of key growth banners, both of which we are accelerating in 2022. Building on the success of our first 50 global community and power stores, we will expand these formats for approximately 300 locations over the next 3 years. Our community and grocery stores enhance both our out-of-mall presence as well as our connection to communities by bringing to life a wider, richer and more locally relevant product assortment.

These stores help us build authentic relationships with our customers on a hyperlocal level by incorporating local elements into physical designs, partnering with local businesses and organizations, and engaging local artists, athletes and influencers. Products from local designers gave special activation and stores are staffed with local staff to deepen ties with the community.

One area where I would like to see improvement is the balance sheet, which carries a BB+ credit rating and is a notch below investment grade. FL’s long-term debt currently sits at $394 million, above its pre-pandemic range of $125-130 million. This is likely due to its recent acquisitions, and I would like to see some deleveraging over time.

Meanwhile, the dividend was recently raised from $0.10 to $0.40, standing above the pre-pandemic quarterly rate of $0.38 per share. The dividend seems well protected with a low payout ratio of 13%.

FL stock appears to be cheap at the current price of $30.40 with a forward PE of 6.8. This translates into a decline in EPS that analysts are expecting this year, but as seen below, it is still well below FL’s normal PE of 12.9 over the past decade. Analysts on the sell side have an average price target of $33.32, implying a potential total return of 15% over one year, including dividends.

Valuation of FL shares

FL valuation (FAST Charts)

Key takeaway for investors

Foot Locker is a shareholder-friendly company that should be able to meet the challenges it faces, with a clear plan to do so. While Nike’s decision to go direct-to-consumer may weigh on FL’s bottom line in the short term, I believe the company is positioned for long-term success as it further diversifies its product line. The recent decline in the stock price appears to have created an opportunity to buy income and growth in a well-diversified portfolio.

James T. Quintero