Foot Locker Versus Finish Line: What Makes One The Clear Investment Winner

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Includes: FINL, FL
by: Brian Nichols

Summary

Foot Locker shares fell hard after Finish Line's disappointing quarter.

While both stocks present value following their losses, one is clearly better.

The reason that one is superior is not that difficult. In fact, Nike explains it quite well.

Foot Locker (NYSE:FL) shares fell nearly 7% last Friday in response to competitor Finish Line (NASDAQ:FINL) noting margin pressure during its third quarter. As I explained in an earlier Seeking Alpha article, Finish Line's valuation makes its stock a great value investment opportunity following its recent losses, as its comparable sales growth and operating margins are still far superior to the majority of U.S. retailers. However, while Finish Line is a good investment following its stock collapse, Foot Locker presents an even better opportunity.

The similarities between Foot Locker and Finish Line end at the fact that both are footwear retailers. In Finish Line's most recent quarter, it grew comparable sales a very impressive 4.5%. In Foot Locker's most recent earnings report, announced last month, its comps increased an even better 6.9% year-over-year. Unlike Finish Line, Foot Locker gave no indication of margin pressure or declining sales growth. In fact, Foot Locker's strong quarter prompted Sterne Agee to increase its EPS revisions for the company's current year, next year and 2016.

That said, how is it that two leading footwear retailers that mostly sell the same products could have such different outlooks? The answer lies in the fact that Finish Line is entirely a U.S.-based company, with 1,040 stores. Meanwhile, Foot Locker is a global company, with 3,474 stores in 23 countries. This is the quintessential difference between the two companies, and what makes Foot Locker the superior investment.

The reason that Foot Locker's global presence works as an advantage couldn't be more evident than in Nike's most recent earnings report - the global leader in footwear sales. Excluding currency change, Nike's footwear sales increased 26%, 32%, 30%, 16% and 15% in Western Europe, Central and Eastern Europe, Greater China, Japan, and emerging markets, respectively. Finish Line does not capitalize on this growth because it is a U.S. company. Meanwhile, Foot Locker has been selective in launching its stores in the most promising of regions throughout the globe.

As a result, the fact that Foot Locker fell so abruptly after Finish Line's quarterly report is quite surprising, as anyone who follows the space should know that challenges for Finish Line might not necessarily apply to Foot Locker. In this case, given the fact that Foot Locker just released earnings last month, and noted nothing but strengths across the board, investors should see that Finish Line's warnings do not apply.

That said, footwear sales in general remain strong, as do sports apparel sales, an area both companies have quickly gravitated toward. According to Barclays, retail athletic apparel will grow 50% by 2020, reaching annual sales of more than $100 billion. Both Finish Line and Foot Locker stand ready to reap the rewards of this athletic apparel growth, along with having leading positions in the footwear industry.

Therefore, Finish Line itself is not a bad investment. In fact, it is a good one. The point here is that Foot Locker is simply a better one.

Disclosure: The author is long FL.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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