Should Foot Locker Be Trading Higher?

| About: Foot Locker, (FL)

Foot Locker (NYSE:FL) has been posting strong growth for the last few years, which is reflected in the company's share price. Since the beginning of 2012, Foot Locker's share price has appreciated by 36%, beating the market by a large margin. In the last 3 years, the company's share price appreciation rate was 165%, which is very impressive.

Strong Balance Sheet

In the last couple weeks, the company's share price has experienced some fatigue after reaching an all-time high of $37. As of right now, the company's share price is around $32 which might be a short term bottom. Given the company's low P/E ratio of 13, low amount of debt ($133 million vs. $850 million in cash), and future growth potential, the company's shares still look cheap, despite a large rate of appreciation in the last few years.

Surprising the Analysts

The company has beat analyst estimates for 10 quarters in a row. As a result, analysts are more positive than ever about Foot Locker. Of the 12 analysts covering the stock, 10 rate the company as a "Strong Buy" and 2 rate it as "hold." In addition, it's worthwhile to remind that 11 of the 12 analysts have increased their earnings estimates for Foot Locker since the company has announced its earnings in late November. The analysts expect Foot Locker to earn $2.56 this fiscal year, $2.83 in the next and $3.12 in the one after. This indicates an annual growth rate of 10%. This also indicates forward P/E ratios of 12.5, 11 and 10 respectively for Foot Locker. Obviously, a P/E ratio in low teens is considered cheap for a company that continues to post double-digit earnings growth annually. In the near future, even if the company simply meets or comes near analyst estimates - let alone beating the estimates as usual - it will continue to be undervalued at the current price.


Even though Foot Lockers is a growth story, it still pays the investors in other ways too. For the last 10 years, the company has either sustained or increased its dividend payments every year. In 2003, the company's quarterly dividend payment was as little as 3 cents per share. By 2004, the rate was doubled to 6 cents per share and it saw 7.5 cents per share in 2005. The next year, Foot Locker was paying 9 cents per share, followed by 12.5 cents per share and 15 cents per share in the next 2 years. This year, the current dividend payment was raised to 18 cents per share per quarter, with a forward yield of 2.21%. Because the company's dividend payout rate is below 30%, the company can easily not only sustain its dividend rate, but also grow it substantially.

Growth Story

The $106 million income posted by the Foot Locker in the last quarter is an all-time high for the company and 60% above the earnings in the same quarter a year ago. Yet, the company's earnings can grow even further. Foot Locker's growth story is very strong as the company posts growth through same-store growth, new store openings and e-commerce growth.

So far this year, Foot Locker has been able to achieve a 9.9% growth in same-store sales. This came at a time when many companies are having trouble seeing same-store growth in low single-digit percentages. The same-store growth was achieved by having competitive prices and introducing a larger variety of products in each store. The company has a number of different types of stores out of which Kids Foot Locker was the best performer and Lady Foot Locker was the worst performer in same-store sales growth. Champs stores achieved an impressive same-store sales growth of 30% in the last 2 years. The rate of growth may not be sustainable in the long term, but strong growth will continue to occur regardless.

The company has been looking for growth outside of USA, and it has launched a number of stores in Europe under the name Foot Locker Europe. Unfortunately, Foot Locker Europe hasn't been growing as fast as Foot Locker in the US, but this could be mostly due to the economical recession experienced in many European countries and weakness of Euro currency recently. Once the European economy gets going again, the company will surely post strong growth in the continent though (even though I personally don't see Europe being out of woods anytime soon, but it will happen eventually).

Number of Stores

Foot Locker has been diversifying its store portfolio by offering different types of stores for different interest groups. The stores operated by the company include Foot Locker US, Footaction, Lady Foot Locker, Kids Foot Locker, Champs Stores, CCS, Foot Locker International. The total number of stores operated by Foot Locker is 3,367 in addition to 40 stores that are franchised in South Korea and the Middle East. The number of Foot Locker US, Footaction, Lady Foot Locker as well as the total number of stores operated by the company has been falling in the last 2 years because of the cost cutting measures conducted by the company. The total square-footage of all Foot Locker stores went from 12,796,000 to 12,420,000 since 2010.

Despite the closing down hundreds of stores, the company continues to grow its revenues and profits. Of course, the company's recent gross margin increase to 33.1% also played a role in this growth. Soon, the company will open more stores than it closes and more growth will be fueled this way. The company will be closing 30 of its least profitable stores by the end of the year and opening 30 more stores, mostly in Europe.

As Americans and Europeans are more focused on exercising and getting healthy, the demand for sports shoes will continue to increase for the foreseeable future. The company reportedly sees strong demand for its basketball and running shoes.


Foot Locker continues to be a strong growth story and the company currently trades for a pretty cheap valuation. This company has been on my radar for a while and I am tempted to get some shares at the end of this month. Despite a price appreciation of 36% year to date, this company continues to be a strong buy.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FL over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.