Foot Locker Looks Good Here

| About: Foot Locker, (FL)
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Foot Locker is trading $1 above 52-week lows and is down ~15% YTD.

A strong consumer spending report reassures me lack of investor confidence is unjustified for Foot Locker.

The new Curry 2.5 is a near-term tailwind.

Last month, Foot Locker (NYSE:FL) released 1Q16 earnings. It reported in line EPS and revenue of $1.99B, missing by $10M. Since then we have seen share price depreciation from $59 to $55, and a 15% drop in share prices year to date. I feel that the low price levels give investors an opportunity to pick up shares of a growing company at a good price.

FL Chart

FL data by YCharts

It is true that FL is facing headwinds from fire sales at Sports Authority, while the rise in popularity of online shoe apps from both Nike (NYSE:NKE) and Under Armor (NYSE:UA) present a new type of threat. I believe, though, that purchasing through apps is no different than buying online and will not hurt Foot Locker's brick-and-mortar sales. In the short run, I do feel that FL will experience a loss in traffic due to headwinds from the Sports Authority's closure this quarter, but this headwind should only be felt in 2Q16, a quarter already expected to have the lowest volume of shoe sales.

Moreover, FL has posted positive comps in the face of competition from Eastbay and AMZN. UA and NKE app competition shouldn't be much different because shoe retail is something challenging to replicate online. FL is an industry with a built-in moat against e-commerce encroachment.

The valuation does not price in this moat. We see FL trading at a 14x trailing earnings and 10x forward earnings. We also see incredibly low EV/FCF and EV/OCF multiples of ~12x and ~9x, respectively, and this is a significant discount to other athletic apparel competitors.

FL PE Ratio (<a href=

FL PE Ratio (TTM) data by YCharts

Looking forward, I see positive comps persisting in 2H16. From the 1Q16 earnings transcript FL CEO Richard Johnson reported that

[They're] confident that by the back half of the year there will be in place all the elements of a more robust, diverse signature basketball business.

While I am a bit skeptical of its ability to beat this quarter given Sports Authority headwinds, I am bullish on the company's ability to live up to guidance of mid-single-digit comps and double-digit EPS growth in FY16.

Lastly, I think it is important to understand how the basketball market will be boosted in the near term. We are currently in a showdown in the NBA finals between Curry (endorsed by UA) and LeBron (endorsed by NIKE). Much like this caused a boom in shoe sales last year, I feel the same will happen this year with the new Curry 2.5.

To conclude, I believe that the NBA finals coupled with a strong consumer spending report this morning and the recent release of the new Curry and Jordan sneakers will give FL an opportunity to stun everyone's expectations this quarter. The report showed that sporting good, book and hobby, and music stores sales have grown 5.2% in May and have grown 4.9% in the last three months. Looking forward, I believe FL has a lot of room to grow and trade at multiples its competitors trade at. I am bullish on FL and feel that lack of investor confidence gives bulls a good long-term opportunity at a discount.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.