Foot Locker Finds Its Footing - Barron's

Foot Locker (FL) may have been tripped up by a fashion shift away from sneakers and the slowdown in consumer spending, but Barron's Christopher C. Williams says the company is finding its footing once again.

The nation's largest retailer of athletic footwear, Foot Locker has $5B in annual revenue, with footwear making up 80% of sales and athletic apparel making up the rest. It operates in 21 countries, and gets 25% of its revenue from international sales.

Management has viewed the downturn as a wake-up call, and an opportunity to make changes to Foot Locker's operations. The company has cut costs and inventory, strengthened its balance sheet and closed stores. As a result, Foot Locker is in a position to get a strong start after the economy picks up. It also pushed the company's gross margins up by 1.3 percentage points in Q1, to 29.3%.

Foot Locker, which is Nike's (NKE) main retail outlet for basketball shoes, has "a very strong presentation of premium footwear and access to products others don't," says one analyst. Marquee sneakers selling for $100 or more generate 37% of U.S. revenue

After earning $0.67/share in FY' 09, analysts expect the company to earn $0.72/share for FY '10, and $0.81/share for FY '11. Long-term annual EPS growth could average 13% if Foot Locker keeps tweaking its operations. The stock pays a dividend of $0.60/share, for a yield of 5.8%.

Foot Locker's P/E ratio of 14 times FY '09 estimated earnings is lower than rivals. Shares trade around $10, below book value of $12.58/share, and could rise to $15 when the retail environment starts to recover. Ken Hicks, set to become Foot Locker's new CEO in August, should help boost the stock as well.

• Susquehanna Financial Group upgraded the stock to Positive from Neutral after better-than-expected Q1 earnings, saying it expects cost-cutting efforts and inventory controls to be sustainable.

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• Foot Locker: Q1 EPS of $0.20 beats by $0.07. Revenue of $1.2B (-7.1%) in-line. (PR)

Comments

[Ted Hurlbut:]

Like every other retailer, costs have been squeezed out. Now FL, like every other retailer, needs to demonstrate that it can move the top line. Stay tuned.

Jul 06 09:32 AM