Finish Line Vs. Foot Locker: A Comparative Case Study

| About: Foot Locker, (FL)

Summary

A comparative quantitative analysis using a unique free cash flow ratio.

Clearly shows which is the superior company.

Shows how one can become a better investor by practicing "Capital Appreciation through Capital Preservation".

On December 21, 2016 Seeking Alpha's News Editor Charles Schultz reported the following: "Finish Line crushed after posting slow sales growth"

Finish Line (NASDAQ:FINL) had a terrible earnings report this quarter and its shares got crushed. After seeing such a terrible results, investors have now started to worry about the company's main competitor, Foot Locker (NYSE:FL), and how it may do when it reports at the end of February 2017.

In this article, I will present a real-time quantitative analysis of both companies employing a unique ratio that will demonstrate the power of free cash flow in the investment process and then give an opinion on how an investor should act based on my results.

The Finish Line, Inc., together with its subsidiaries, operates as a specialty retailer of athletic shoes, apparel, and accessories in the United States. It operates in two divisions, the Finish Line and JackRabbit. The company's Finish Line division engages in the in-store and online retail of athletic shoes for Macy's Retail Holdings, Inc., Macy's Puerto Rico Inc. and Macys.com, Inc., as well as online at macys.com. This division offers men's, women's, and kids athletic shoes, as well as an assortment of accessories of Nike (NYSE:NKE), Skechers USA (NYSE:SKX), Converse, Puma, New Balance, Adidas, and other brands. As of April 2, 2016, the company operated Finish Line shops in 392 Macy's (NYSE:M) department stores in 37 states in the United States, the District of Columbia, and Puerto Rico.

Wall Street crushed Finish Line's shares because comparable store sales for the quarter rose only +0.7% versus +8.0% consensus estimates. But then the company made matters worse when it also reported that it expects FY17 comparable store sales growth to be flat to +1% and that EPS of $1.24-1.40 is seen versus $1.53 consensus.

When such bad news hits, investors tend to run first and ask questions later, which makes things worse, as panic sets in. The secret to avoid getting caught in such a nightmare scenario is to concentrate on "Capital Appreciation through Capital Preservation", or in other words, to try and get the numbers right before a company reports its results. In my opinion, the best way to do this is to look back over the last ten years in a company's financial history (on Main Street) and look for consistency and a solid pattern of growth.

When analyzing almost any company, concentrate on its free cash flow generation, as that is where the rubber hits the road when it comes to finding out the truth. Before I show you the long-term datafile for Finish Line, let us first do a TTM (trailing-twelve month) analysis of its Bernhard Buffett Free Cash Flow and then compare it to its current price.

Here are the two ratios that we will be using in our analysis, and for those new to this type of analysis, one can get a good introduction by reading my analysis of Apple Inc. (NASDAQ:AAPL) by clicking here.

Price-to-Bernhard Buffett Free Cash Flow Ratio = Sherlock Debt Divisor/(net income per share + depreciation per share) + (capital spending per diluted share)

Sherlock Debt Divisor = Market Price Per Share - ((Working Capital - Long-Term Debt)/Diluted Shares Outstanding)

Finish Line

Market Price Per Share = $21.00

Working Capital = Total Current Assets - Total Current Liabilities

Total Current Assets = $522,800,000

Total Current Liabilities = $245,600,000

Working Capital = $277,200,000

Long-Term Debt = $0

Diluted Shares Outstanding = 41,900,000

Sherlock Debt Divisor = Market Price Per Share - ((Working Capital - Long-Term Debt)/Diluted Shares Outstanding))

Sherlock Debt Divisor = $21 - (($277,200,000 - $0)/41,900,000))

Sherlock Debt Divisor = $21 - $6.62 = $14.38

Since Finish Line has less Long-Term Debt vs. Working Capital, we therefore must reward it and use the new $14.38 as the new numerator in all our calculations.

Price-to-Bernhard/Buffett Ratio = Sherlock Debt Divisor/(net income per share + depreciation per share) + (capital spending per diluted share)

Sherlock Debt Divisor = $14.38

Net Income per diluted share = $13,800,000/41,900,000= $0.329

Depreciation per diluted share = $47,100,000/41,900,000 = $1.124

Capital Spending per diluted share = $-66,200,000/41,900,000 = $-1.579

$0.329 + $1.124 + ($-1.579) = $-0.126

Price-to-Bernhard/Buffett Free Cash Flow Ratio = $14.38/$-0.126 = -114.13

Now if you go to my Friedrich Legend (on what is considered a good or bad result), you will notice that our result of -114.13 is bad. Not only is it bad, but whenever I get a negative result, I immediately assign the stock as a short and give a $0 valuation for its Main Street, Bargain and Sell Price, because I want investors using my system to avoid it.

We last ran our datafile for Finish Line on December 6, 2016, and our Friedrich Algorithm gave a recommendation to our subscribers to short it.

Here is a quantitative chart on Finish Line that shows that things are not looking too good for the company:

Then, here is the chart of our Price-to-Bernhard Buffett Free Cash Flow ratio results for Finish Line:

The Price-to-Bernhard Buffett Ratio considers a stock a bargain when it trades under 15 times and a sell when it trades over 30 times. So back in 2010, an investor in Finish Line would have had smooth sailing, as our ratio indicated it was a bargain at $12.09, and the company's shares proceeded to go to $27.02 in 2014. The numbers for Finish Line then deteriorated to the point where it eventually received a short recommendation from my Friedrich Algorithm. Finally, from this latest quarterly report from the company, we had confirmation that this was the right move to make.

Having now concluded our opinion on Finish Line, let us now move forward with Foot Locker and try to determine if the company could suffer the same fate as Finish Line or not.

Foot Locker, Inc. operates as an athletic shoes and apparel retailer. The company operates in two segments: Athletic Stores and Direct-to-Customers. The Athletic Stores segment retails athletic footwear, apparel, accessories, and equipment under various formats, including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and SIX:02, as well as Runners Point and Sidestep. As of August 30, 2016, it operated approximately 3,400 stores in North America, Europe, Australia, and New Zealand. The Direct-to-Customers segment sells athletic footwear, apparel, equipment, team licensed products, and private-label merchandise through Internet Websites, mobile sites, and catalogs.

Here is our Price-to-Bernhard Buffett Free Cash Flow Analysis of Foot Locker.

Foot Locker

Market Price Per Share = $73.75

Working Capital = Total Current Assets - Total Current Liabilities

Total Current Assets = $2,517,000,000

Total Current Liabilities = $543,000,000

Working Capital = $1,974,000,000

Long-Term Debt = $127,000,000

Diluted Shares Outstanding = 133,800,000

Sherlock Debt Divisor = Market Price Per Share - ((Working Capital - Long-Term Debt)/Diluted Shares Outstanding)

Sherlock Debt Divisor = $73.75 - (($1,974,000,000 - $127,000,000)/133,800,000))

Sherlock Debt Divisor = $73.75 - $13.80 = $59.95

Since Foot Locker has less Long-Term Debt vs. Working Capital, we therefore must reward it and use the new $59.95 as the new numerator in all our calculations.

Price-to-Bernhard/Buffett Ratio = Sherlock Debt Divisor/(net income per share + depreciation per share) + (capital spending per diluted share)

Sherlock Debt Divisor = $59.95

Net Income per diluted share = $633,000,000/133,800,000= $4.73

Depreciation per diluted share = $157,000,000/133,800,000 = $1.173

Capital Spending per diluted share = $-248,000.000/133,800,000 = $-1.85

$4.73 + $1.17 + ($-1.85) = $4.05

Price-to-Bernhard/Buffett Free Cash Flow Ratio = $59.95/$4.05 = 14.80

14.80 is an excellent result, but when you chart out the last ten years of results for Foot Locker, you get the following:

The above chart's strong results are backed up by our unique Quantitative Chart below, which clearly shows a strong pattern of consistency and a strong upward trend. Foot Locker also has a sell price of $101.72, which is the real-time price per share where our Friedrich Algorithm believes the shares would be fully valued.

Going forward, you can clearly see that both companies' results came in at opposite ends of the spectrum. While Finish Line's results are all over the map and show zero consistency, Foot Locker's results show it still has room to grow and should continue to do well in the future. The consistency it has shown also tells us that Foot Locker's management is top-notch, as it has proven itself to be more than "able", which is the hallmark of strong management, according to the father of qualitative analysis, Philip A. Fisher.

In conclusion, it is my belief that free cash flow analysis is the ultimate tool when analyzing companies, and my hope is that you may add these ratios to your own investor tool box in order to help you in your own due diligence. If you have any questions, please feel free to ask them in the comment section below.

Disclosure: I am/we are long AAPL.

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.

Additional disclosure: DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

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Tagged: , Apparel Stores, Earnings
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