Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message| ()  

Shares of Foot Locker (FL) fell some 7.1% in Friday's trading session. The retailer of athletic shoes and apparel, which operates over 3,300 stores, issued a little inspiring outlook when the firm reported its fourth-quarter results before the market open.

Fourth-Quarter Results

Foot Locker reported fourth-quarter revenues of $1.71 billion, up 14.0% compared to the same period last year. Like many other retailers, Foot Locker's final quarter of 2012 included a 14th working week, which boosted the results. Comparable sales grew by 7.9%, trailing annual comparable sales growth of 9.4%. Revenues came in ahead of analysts consensus of $1.69 billion.

Gross margins for the business increased 90 basis points to 32.9%, driven by a 50-basis points improvement as a result of the 53rd working week. At the same time, selling, general and administrative expenses fell by 20 basis points, to 20.6% of total revenues. All in all, operating margins expanded by a full percent point to 9.2%

Net income for the quarter came in at $104 million, or $0.68 per share, after the company took a $7 million impairment charge related to its CCS division. Despite the impairment charge, earnings still grew 28.4% compared to last year's net income of $81 million.

Non-GAAP earnings came in at $111 million, or $0.73 per share. The additional week added $14 million in earnings, or $0.09 per diluted share. Earnings came in exactly in line with analysts' consensus estimates at $0.73 per share.

Looking into 2013

Foot Locker is confident for the full year of 2013:

CEO and Chairman Ken C. Hicks commented on the outlook for the coming year, "We believe that we can continue to build on this momentum and deliver a double digit percentage earnings per share gain for full-year 2013, compared to our 2012 non-GAAP results of 2.47 per share."

The guidance implies that full-year earnings for 2013 are expected to come in between $2.72 and $2.96 per share, with a midpoint of $2.84 per share. The midpoint of the earnings guidance comes in line with analysts estimates.

Same-store sales growth is expected to slow down from 9.4% in 2012 to growth in the mid-single digits. Sales are expected to slow down as a result of the payroll tax increase and a delay in tax refund checks, among others.

Valuation

Foot Locker ended its full year of 2012 with $928 million in cash, equivalents and short term investments. The company operates with $133 million in long term debt, for a net cash position of approximately $800 million.

For the full year of 2012, Foot Locker generated annual revenues of $6.2 billion on which the company reported a net income of $397 million, or $2.58 per diluted share.

After Friday's sell-off, the market values Foot Locker at $4.9 billion. This values operating assets of the firm at around $4.1 billion, or 0.7 times annual revenues and 10-11 times annual earnings.

Foot Locker currently pays a quarterly dividend of $0.20 per share, for an annual dividend yield of 2.4%.

Some Historical Perspective

Shares of Foot Locker have seen their ups and downs as a publicly listed company. In the early 1990s shares were trading at highs of $35 as its shoes were in demand. Later that decade, in 1999, shares hit lows of $5 as its shoes have gone out of fashion again. Shares re-bounded after the turn of the millennium but fell back to $5 again during the recession of 2008 and 2009.

Over the last year, shares have gradually gained ground setting highs around $37 by October of 2012, setting new all-time highs in the process. Shares have been stagnating around $35 ever since, and are currently exchanging hands around $33 per share after the results on Friday.

Between 2008 and 2012, Foot Locker grew its annual revenues by almost 20%, from $5.2 billion towards $6.2 billion. The company reported an $80 million loss for 2008, but gradually boosted its profitability towards $400 million over the past year.

Investment Thesis

Overall, the performance in the fourth quarter was satisfactory. Yet investors are not too pleased with Foot Locker's guidance as it calls for a continued slowdown in comparable-store sales growth into 2013. Some investors were also nerved by the 9.2% increase in the inventory position, which came in at $1.17 billion. The company stresses that inventories came in unchanged on a pro-forma basis.

Last month, Foot Locker outlined a new financial strategy to its shareholders. The company recently hiked its quarterly dividend by 11% to $0.20. The company furthermore authorized a new $600 million share repurchase program, sufficient to retire 12% of its outstanding shares at current levels. At last, Foot Locker announced a 35% increase in its capital expenditure budget to $220 million per annum.

Yet there are some operational risks to Foot Locker's growth story. Key for the business is its inventory management, which in Food Locker's history has led to severe losses as the company's inventory has gone out of fashion already before. Another key worry is the fact that Foot Locker is still heavily dependent on its key supplier Nike (NKE), of which it purchases the majority of its shoes and apparel.

The rising popularity of its basketball shoes, which sales rose 20% in the final quarter, has driven sales and earning expectations. Running shoes, classic footwear and entry-level apparel was less in demand, but still increasing compared to last year. The increase in the capital expenditure budget will result in more store openings in Europe and Kids Foot Locker. At the same time, the CCS store operations, which have focused on skaters, have been completely impaired. From now on, CCS will only serve customers online.

Investors are still a little disappointed with Foot Locker's performance as same-store sales growth continues to slow down. Same-store sales growth came in at the low-double digits in November, falling to high-single digits in December, and towards mid-single digits in January. The increase in the payroll tax and the delay in refund checks have continued to put pressure on same-store sales growth.

Overall, the valuation remains in check. Shares trade around 10-11 times 2012 earnings, while paying out a 2.4% dividend yield. At the same time, the financial strategy and strength allows the company to increase payouts to its shareholders. The recent declines make for an excellent entry point for long-term holders.

Source: Foot Locker: Slow Down In Comparable Same-Store Sales Growth Is Sending Shares Lower