Foot Locker's Achilles Heel

My scans of the stock charts this week are showing a nice short sell on a famous tennis shoe retailer. It sold off about 5% on Friday after the unemployment rate hit 5.5%, oil spiked back up to $11.00 to end the day at about $138 a barrel, and an analyst at research firm Sterne Agee posted a hold rating on this stock giving it a $12.00 price target.

Short Sell: Foot Locker (FL)

First, my analysis to sell or buy is mostly from the technical perspective as I'm looking for low risk high reward trade setups of at least 3:1 reward risk. Foot Locker is showing about a 3.5:1 reward risk ratio. Now reward risk ratios are subjective also, and my analysis of this could be wrong. Simply put, this business of investing and trading is more an art than a science. . . predicting the future I mean. I do look at the forward fundamentals of the general market, and the companies in considering my buy and sell positions. Since I use stop-loss, and stick to my stop-loss rules, whether I'm right or wrong, I've got a long term winning system. So when the market proves me wrong, just like the market proves anyone wrong, I take the small loss and move on to the next investing and trading idea. I hope you are using stop-loss too. Live to invest and trade another day right? Right!

FL Short Sell Trade Setup

• Sell at current price of $13.74 or higher up to 15.08.
• Stop-Loss 8% or any amount you can handle losing.
• Take Profit Areas.
• Short Term $12.40

5/22/08 saw a low of $11.84, and 5/23/08 saw a gap up opening at $12.81 on bigger than normal volume with a close at $13.54. I’m betting these fresh longs will be tested along with a price of $12 or so anytime now.

• Intermediate Term $11.06 to $9.72
• Long Term $9.01 to $8.20
• Longer Term $6.64 to $7.30 if things get and continue to stay ugly for Foot Locker

Depending upon which ratings service you’re using, Foot Locker has a PE of 42 to 59. With the economy in trouble, would you be buying $100.00 plus tennis shoes or paying off overdue bills?

The longer term scenario could play out, if Foot Locker doesn't unload its overloaded inventory, close some stores, and their earnings next quarter come in lower. I've heard comments of a Foot Locker stock price lower than 6 dollars a share if they don't get it together soon enough. What are you buying this year? Tennis shoes or technology gadgets? Tennis shoes look cool, and feel good, but many tech gadgets can help you be more productive. I would say at least this year, vanity will take second seat to tech. My recent long position in AMD is proving that to be right so far.

Foot Locker Competition

Competitors to Foot Locker are Finish Line (FINL) and Wal-Mart (WMT). I'm betting Wal-Mart fairs the best of those stores selling tennis shoes with their discount pricing and exponential market reach over Foot Locker.

Foot Locker Company Profile

Foot Locker, Inc. is a global retailer of athletic footwear and apparel, operated 3,785 primarily mall-based stores in the United States, Canada, Europe, Australia, and New Zealand as of February 2, 2008. 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.

Disclosure: short FL

Comments

[drmalaka:]

I have owned FL puts for some time and am not going well. I added to the position when it went up near $15 after that crazy quarter. They missed lowered guidance by two cents and then said they still expected to meet this year's guidance. Then the buying began by people who had smoked too much crack that morning and I started losing more money.

Bottom line is I love this short. I was in a FL in Houston last week, it was empty and that is one of the few cities doing well in our country. The idea that this store can hit yearly numbers is insane to me. But the market is still considering a second half recovery.

The stock is still above where it was before the quarter announcement and to me is still a great short here. To me this is a double whammy, a lousy business to be in and in a weak economy. I am sitting tight and awaiting the next quarter numbers as I seriously doubt they will pre announce bad numbers coming. The company already painted a rosy picture by claiming yearly numbers would be met, seems like they will wait to the last second to admit what reality is.

2008 Jun 10 06:15 PM

[Billie:]

I've lost so much money on this company stock, I was in a FL in Miami, Florida and it was completely empty, I'm going to unload this stock tomorrow, I agree it will take a hit before the next quarter comes around, the shoes and the apparel in the store were just pathetic looking, I'm not sure why big brands like Nike & Reebok are just collecting dust in the stores, people were just looking at the pairs and leaving without a purchase, something tells me is more than just buying a style when the pairs all look the same across the store.
If the FL management team doesn't realize the stores are all dull and boring then how on earth should we trust them with our financial investment?

2008 Jun 11 03:19 AM

[adan:]

interesting article; i don't do individual stocks much anymore, so my comment is strictly filler for ya'll guys

i bought two pairs of decent quality cross training shoes this past weekend, first such purchases in a year, bought one on sale and the other on clearance, and don't anticipate buying anymore for a year or more (really; i just use them to jazzercise)

not sure i'd be buying any more electronic gadgets anytime soon either; though i know we'll be needing new cell phones (after over 2 yrs w/same) and a new lap top (after over 6 years w/same)

just a little anecdotal info :-)

2008 Jun 11 02:55 PM