Retail: We're Most Optimistic About Foot Locker

Spotlight On: Retail-Apparel

The U.S. retail clothing industry includes approximately 11,000 stores nationwide and accumulates a combined $150 billion in revenues each year. The retail clothing industry is very concentrated and the 50 largest companies bring in 65% of the total industry revenue. Most companies in the retail clothing industry are specialized and have found a niche market of customers to appeal to such as women's wear, sporting apparel, maternity, men's clothing, or children's clothing. The size of retail clothing companies range from small independently owned boutique shops to large department stores.

Trends in the retail clothing industry have changed dramatically over the past couple of years, especially in response to the recent economic turmoil. A few of the most significant for 2009 and upcoming years are:

1. Reduction in Advertising Spending
2. Increase in Coupons and Sales
3. Fewer Premium-Priced Products Introduced

There are approximately 48 publicly traded clothing retailers in the U.S. As of 08/21/2009, the retail - apparel industry's public companies have a median P/E ratio of 18.1, a median price to free cash flow ratio of 14.2 and a median price to sales ratio of 0.5. We screen our database for companies with a minimum market capitalization of $1 billion and some evidence of balance sheet strength. Our screen produces a list of 16 companies. Sales values for these 16 companies range from $999.1 million to $19,243.13 billion dollars.

The top five publicly traded retail clothing companies ranked by sales are:

1. TJX Companies Inc. (TJX)
2. The Gap, Inc. (GPS)
3. Ross Stores (ROST)
4. Foot Locker (FL)
5. Coach (COH)

Reuters published an article on August 21, 2009 by Alexandria Sage in which Sage speaks directly to this topic. Relative to the companies mentioned above, she states that last week Gap posted "grim second-quarter sales." She goes on to say,

2009 has been a year of cost-cutting, as retailers have lowered inventory, curtailed capital spending and streamlined their operations in order to offset the lingering sales slump caused by shoppers' aversion to spending in the downturn.

In this environment, it is difficult to get too excited about retail apparel companies. Of the five companies listed above, we are most optimistic about Foot Locker and find the company attractive on a price to sales basis. From Reuters,

Foot Locker, Inc., incorporated in 1989, is a global retailer of athletic footwear and apparel, which operated 3,641 primarily mall-based stores in the United States, Canada, Europe, Australia and New Zealand as of January 31, 2009. The Company, through its subsidiaries, operates in two segments: Athletic Stores and Direct-to-Customers. The Athletic Stores segment is an athletic footwear and apparel retailer, whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports and Footaction. The Direct-to-Customers segment reflects Footlocker.com, Inc., which sells, through its affiliates, including Eastbay, Inc., to customers through catalogs and Internet Websites. The Foot Locker brand is the Company’s principal brand. On November 5, 2008, the Company acquired CCS from dELiA*s, Inc. CCS is a direct-to-customer retailer that sells skateboard equipment, apparel, footwear and accessories through catalogs and the Internet.

Foot Locker has a current PSR of about 0.33 which is low for the industry and low for Foot Locker. Though sales growth is negative and the company is losing money, free cash flow remains strong, debt is at low levels, and the company has $415 million in cash. We believe the company has the wherewithal to weather the current turbulence and return to a more normalized target price of $17.00.

Disclosure: No positions.

Comments

[HATEFEEBAY:]

Go FL! :-) With the dividend, this is a no brainer to hold!

Aug 24 09:28 AM

[captainccs:]

>>> Sales values for these 16 companies range ... to $19,243.13 billion dollars.

$19 trillion? ;)

You might want to drop three zeros, Wal-Mart sells 400 billion.

Aug 24 09:56 AM

[Techtrader10:]

Lot's of "fluff" in this article, not much to say the gross revenues will increase, let alone the bottom line. The gross sales have been in a downward slide for a couple of years now, and now they have gotten to the point where they can no longer cut costs enough to keep the bottom line on the plus side. I've walked by the local shopping center Foot Locker store over the past 8-10 months and never see anyone in the store. I'm afraid there are too many competitors to make Foot Locker an easily fixed problem. With deminishing sales and rents that do not, it will be increasingly hard to make their numbers.

Aug 27 09:53 AM

[BigPapa68:]

What suggestions do you have that would help pull Foot Lockers head out of the diminishing economical rabbit hole? Better or more advertising, improve product line, etc... If you were the new CEO, what changes would you make to improve the overall look of the company? Do you believe that being more involved in athletic competitions would improve Foot Lockers face in the crowd? Are there other companies that Foot Locker would benefit from purchasing that would put them a leg up from it's competitors?

Sep 09 10:12 AM

[bminfo247:]

Great information! Yahoo Finance has an article about the current climate for merchandise sellers such as Foot Locker:
finance.yahoo.com/news...

Sep 11 10:52 AM