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Foot Locker Inc. (NYSE:FL) is following an aggressive strategy to pursue its brand expansion. These strategies include driving digital sales and marketing, and expanding operations of the company to the global market. These strategies have proved to be prolific as the company posted a substantial recovery in FY10 after a decline in the company's performance in FY09. A substantial improvement was achieved by employing technological advances and boosting sales through Internet and mobile websites. Similarly, Eastbay is Foot Locker's affiliate which provides athletes with sports solutions in the U.S. Foot Locker competes against some of the biggest global brands in the world such as Nike (NYSE:NKE) and Adidas (OTCPK:ADDDF).

Growth and Performance

Following these expansive strategies the company has shown robust growth and the market share of the company has been improving as well. A report by Barron's has indicated a strong upside potential in the stock despite some minor takeaways in the near term.


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Source: Bloomberg

The above chart shows the stock price of Foot Locker as compared with the S&P 500 index since the beginning of FY13. The chart clearly shows that the company has slightly managed to outperform the market in this period. At the same time, the financial performance of the company shows remarkable step up which has not been reflected in the stock price.


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Data Source: Morningstar

The above chart shows the revenues and profit margins of the company since FY09. In this period, the company's revenues have grown projecting a CAGR of 8.4%. The operating margin of the company has increased from less than 2% to approximately 10%. Similarly, the net margins also project an upward trend by increasing from approximately 2% to 6% in these four years. The improvement in margins did not adversely affect the market share of the company. In fact, in recent quarters, the company has been stated to have improved its market share. As a result of this performance, the company's per share earnings have improved from $0.3 in FY09 to $2.58 in FY12.

Data Source: Morningstar

The above chart shows the increase in total assets of the company which occurred in FY09 to FY12 as indicated by the linear trend line. As the economic environment started to bounce back from the financial meltdown and the demand for the product started to recover, the financial performance of the company started supporting the growth in assets. The total assets of the company projected a CAGR of more than 6% during this period.

Financial Stability

The company's overall performance has proved to very efficient in terms of management of its financial resources. The company has been able to project decent growth over the last four years in its revenues, profits and assets. However, this improvement has not been achieved at the cost of financial risks.


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Data Source: Morningstar

The above chart shows the breakdown of the company's free cash flows over a period of four years. As explained above, in this period the company experienced decent growth in its assets. The growth in assets was supported by an increase in capital expenditures which is visible in the chart; however, the operations of the company were robust enough to produce commendable increase in operating cash flows resulting in stable free cash flows over the period.

Valuation

In order to evaluate the company as a prospective investment opportunity, the key valuation metrics must also be considered.

Data Source: Morningstar

The above table shows the important valuation metrics of Foot Locker and compares them with the industry valuations. The table clearly indicates a strong undervaluation as the share trades at a substantial discount as compared with the industry. The stock price has shown an upward trend since mid April but the undervaluation persists. This provides a substantial upside potential for investors as stock price appreciation appears to be imminent given the impeccable financial performance and stable growth of the company.

Conclusion

The stable and profitable growth of the company, coupled with the prospects of regional expansion, support from technological advances and a sizable undervaluation by the market makes Foot Locker a lucrative investment opportunity for investors. Recently, an increase in share price has occurred but I believe it is not enough to reflect the performance of the company and going forward, there is much more potential for price appreciation. Therefore, I propose a buy recommendation for investors.

The company is announcing its first quarter results in three days. Considering the last four earnings announcements, the share price fluctuation within one day of earnings announcement cannot be expected to be more than 2%. However, if investors are interested in hedging their downside risk, I propose that they consider in the money, June 22 protective put option strategy with a strike price of $40 which is currently trading at $3.6. As the stock currently trades at $36.59, the option will limit the downside fluctuation to less than 0.5% while keeping the profits uncapped.

Source: Foot Locker Inc. - Recent Strategies At Play