I told you there was rare opportunity in the stock to Foot Locker (NYSE:FL) this spring. Since then shares are up over 35% (figure 1). I hope you took my advice because the stock has been on an incredible run since then, but I think there is a lot more room to run. Look to competitors in the athletic footwear sector. On a valuation basis, FL trades at just 16 times current earnings whereas major competition are well over 20 times earnings, even approaching 30 times earnings. Further, performance has been stellar from an operational perspective which I will discuss. I saw value in this name and seized the opportunity. But I think even at $75 a share there is still far more upside. The kicker for me is that the growth of the company outpaces the trading multiple. It is doing things right as a company. Foot Locker is known for managing its properties well in the last few years, maximizing efficiencies. The fact is, it remains a much better play than its peers and isn't facing the same struggles as some competitors.
Figure 1. Share Price History of Foot Locker Since in 2016.
Source: Google Finance/Author's Edits
Just take a look at recent performance. In Q3, the company continued its efficiencies which I described in the opening paragraph. Sure all companies are constantly opening and closing stores, but I have found in my history with the company that Foot Locker doesn't waste time. It seizes opportunities and folds 'losing hands'. The company opened 21 new stores, remodeled or relocated 40 stores and closed 28 stores. As of October 29, 2016, the company operated 3,394 stores in 23 countries in North America, Europe, Australia, and New Zealand. In addition, 56 franchised Foot Locker stores were operating in the Middle East and South Korea, as well as 15 franchised Runners Point stores in Germany. Now look. I love the efficiency, but is this having an impact on performance, financially?
I would have to say most definitely. As a matter of fact Foot Locker continues to exceed expectations. A cursory glance at the most recent earnings headlines shows this quite clearly. What do I mean? Well, Foot Locker reported net income of $157 million for its most recent quarter or $1.17 per share. This signifies growth of an astonishing 105% over the $0.57 per share earned in last year's comparable quarter. But wait there's more!
We cannot just rely on the headlines. Digging deeper, we see that same-store sales were incredibly strong. They jumped 4.7% year-over-year while revenue generated at these stores jumped 5.1%, to $1.79 billion in Q3. Of course, currency issues continue to plague domestic companies, and if we control for this impact, sales were up 5.5%. Further, on an adjusted basis, earnings were up to $1.13 per share. On top of that, there were other key strengths like expenses declining to 19.4% of sales. This helped gross margin improve to 33.9%. That is impressive. What is more, I see no reason why the growth will not continue. Let me be very clear. This was an incredibly profitable quarter for the company.
So operationally things continue to be strong. The balance sheet is more than respectable, as it is cash rich with limited debt. It has cash and cash equivalents of $865 million, with $128 million in debt. Further, the company is looking out for shareholders. During Q3 2016, Foot Locker repurchased 1.15 million shares of its common stock for $76.3 million. The company also recently raised its dividend to $0.275 quarterly and paid out $37 million in the quarter. While the stock is not high yielding by any means, there is room for dividend growth. In fact, I predict we will see another hike in the dividend and should performance continue, annual dividend hikes could be the norm. Looking ahead to the rest of the year and into 2017, I see mid-single-digit comparable sales gains and continued double-digit earnings growth. This is not one to short. Either go long or avoid it. Get on board or get run over.
Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "Follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."
Disclosure: I am/we are long FL.
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.