Foot Locker's Turnaround May Have Some Legs

 |  Includes: FL, SCVL
by: Alan Brochstein, CFA

For those who follow me, you know that Shoe Carnival (NASDAQ:SCVL), has been a favorite of mine over the past couple of years. It remains in my Top 20 Model Portfolio despite a big run this year. As I review the shoe retailers, though, I find Foot Locker (NYSE:FL) to be cheaper and certainly meriting closer investigation.

For those not familiar with FL, you must not visit the mall very often! Kidding aside, a trend away from malls towards strip-centers has been one of the factors hurting the company. Additionally, with such a heavy emphasis on athletic shoes, the company hasn't fully participated in the big trend towards boots that other retailers have reported.

The big catalyst for the company may be the late June hiring of a new CEO, Ken Hicks, who joined from JC Penney (NYSE:JCP), where he was President and Chief Merchandising Officer and a member of the Board of Directors. He has experience in the industry, serving as President of Payless Shoesource (part of Collective Brands (NYSE:PSS)) prior to JCP. With the recent turnarounds at Chico's (NYSE:CHS) (the real deal in my opinion - a brilliant hire) and DSW (NYSE:DSW), which both hired new CEOs, this one is worth investigating further. Hicks is a West Point grad and a Harvard MBA. In my initial review, it was not yet clear to me how his leadership will differ from his predecessor.

FL saw sequential growth last quarter and expects to see it again, but its same-store sales are still negative. The company has done a good job of controlling inventory and has avoided excessively promotional pricing. In fact, its merchandising margin increased from a year ago by almost 1%. The company has a strong balance sheet, with $300mm cash net of debt. FL operates about 3500 stores, mostly in the U.S. but with significant exposure to Europe as well. It has been reducing its footprint modestly.

No matter how I look at it, the stock looks very cheap. Tangible book value of $1.7 billion exceeds the $1.56 billion market cap. Compared to estimates for the coming fiscal year, the stock trades at a reasonable 14.6 PE. Compared to peers, the EV/Sales ratio is among the lowest. The 6% dividend is possibly sustainable, though the company could certainly decide that it isn't the best use of capital. In the chart below (click to enlarge), one can see how attractive the current valuations are historically:

I think that the chart looks pretty decent as well. The stock made a "V" bottom a year ago and has been basing between 10 and 12 mostly since then. While it might shake-out towards 9.50 over the next few days, I wouldn't be surprised to see this one play some catch-up relative to its peers and test that 52-week high of 13 (a 30% gain). The stock remains down about 2/3 from its all-time high in 2005:

FL Daily
I think that this one is probably worth watching very closely, though I haven't yet added it to my watchlist. The stock is cheap, and I think I understand why. I plan to try to get a better handle on the new CEO - that seems likely to be the most important catalyst ahead.

Author's Disclosure: No position in FL