Foot Locker Earnings Reaction: Buy The Dip

Summary

• Footlocker stock is getting hammered after missing holiday sales estimates.
• This sell-off feels like a gross overreaction.
• The longevity of Footlocker's business is being materially undervalued by the market.
• This feels like a good time to buy the dip.

Foot Locker (NYSE:FL) stock is reeling after the company missed revenue and comparable sales estimates in the all-important holiday quarter. As of this writing, FL stock is down roughly 15%. One analyst has already rushed out and said buy the stock on this weakness. We agree with that sentiment. After digging through the report and looking at the numbers, we think the rebound narrative at FL remains largely unchanged, and that the stock is simply cheaper now than it was before. Moreover, this is a low-multiple, very beaten-up stock which should perform quite well even in the face of rising interest rates. Consequently, we think this is a "buy the dip" opportunity.

FL data by YCharts

FL did miss comparable sales estimates in the quarter, and that isn't good, especially against the backdrop of an economy with burgeoning consumer spending and sky-high consumer confidence. Those macroeconomic factors were supposed to translate into sales tailwinds for the company. Instead, FL reported a comparable sales decline of 3.7%, at the low end of management's down 2% to down 4% guide. It's also in line with last quarter's comp decline of 3.7%, implying that the sales recovery is moving along at a snail's pace.

But comps did improve on a 2-year basis, as the lap was tougher (+5% this quarter versus +4.7% the previous quarter), so sales trends are improving on a zoomed-out basis. Meanwhile, FL's big U.S. stores (Foot Locker U.S., Kids Foot Locker, and Champs Sports) were among the company's best-performing this quarter, and that means the foundation of this business is still solid. Comparable sales growth is expected to turn positive next year, and that is no surprise considering the laps get pretty easy starting in the second quarter. Gross margins came in as expected, and management expects them to start rebounding next year. That would be huge, considering FL stock pretty closely tracks its margin trajectory. A margin rebound next year would imply upward momentum in the stock.

FL data by YCharts

The overarching fear of FL getting squeezed out of the athletic retail game by Nike (NKE), Adidas (OTCQX:ADDYY), Under Armour (UAA), and others, all pushing direct over wholesale, is still very real. But we continue to believe that FL has longevity in this dynamic athletic retail environment given its brand positioning among consumers and differentiated shopping experience. Unlike many other wholesalers, FL has actually has a positive brand image, thanks to athlete endorsements and commercials. Plus, the in-store experience with things like "House of Hoops" is unique. The combination of that brand and unique in-store experience will allow the company to continue to operate at a stable level where others (like Finish Line (FINL)) may struggle.

Consequently, when it comes to FL stock, we believe investors are looking at a stable operation with potential comparable sales and margin inflection points next year. Moreover, the stock is trading at less than 9 times 2018's earnings estimate, there's $850 million in cash on the balance sheet, shares are being repurchased in bulk, and the dividend yield is above 3%.

FL data by YCharts

FL Dividend Yield (TTM) data by YCharts

All in all, the only reason you don't buy FL stock here is if you think the company is going the way of Blockbuster. That is a distinct possibility considering how aggressively brands like Nike are pushing direct sales, but the wholesale channel is still an important part of the retail picture for big athletic brands. So long as that remains the case, FL will have a seat at the table, and its operations will have longevity. That makes FL stock, trading at 9 times forward earnings with a 3% dividend yield and potential critical inflection points on the horizon, a buy on this dip. It looks like negative comps and margin compression are starting to move into the rear-view mirror. If so, this stock could catch fire by the second half of the year.

Analyst’s 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.

Comments

[JohnnyM]

I tend to agree with the article and many other ones where a retail stock gets whacked hard from its recent highs and then slowly retraces its steps back to a firmer trading level. Now days later, one needs to look at the chart and witness the steady lower end churn and now the accumulation of $FL into the mid 40's.

Guidance and all other factors taken into consideration provides money managers the gift of a much cheaper stock which can only be had for so long. Now $FL is tracking the 45-46 area. The shock is reactionary. Immediately many analysts spoke of the need to own $FL on the dip but many refused to see that light and looked away. Buybacks and new tax benefits may have been overlooked but savvy managers have been salivating.

Foot Locker will trade once again in the 50's and perhaps higher down the road. It doesn't have the glitz of a NKE or other brand name but it does have more than a pulse.
Let's revisit in a few weeks. Let's see if the stock was a good buy and hold play in the low=mid 40's. The stock is under accumulation. Thanks for the article. jm

[Chilled]

Just a hypothesis. The more retailers report the year end comps, the more FL will decline as investors will move to the winners.

[zubbub]

"regarding FL something else is afoot"

You're a natural punster, but the question is, what apparel is being put "afoot" if it's not sportswear.?

[Andreas Hopf]

No pun intended. I am genuinely curious.

I invest in online and offline retailers so I want to understand better what afflicts FL. I have the suspicion that the brand mix and price point mix is off, as the WTP in the young consumer cohort is still intact.

[zubbub]

"are athleisure sales declining across the board?"

This has certainly been argued by many analysts. The claim is that ath-fashion - which took off in the eighties - is in decline. That would make some sense. The trend lasted 30-40 years, until, as nature would have it, it became the look of parents and even grandparents. Yeck. So some kids are turned off and looking for something new. However, whatever that "new" is - as long as it's not going barefoot - good retailers should get on top of it and adjust. The bigger problem is the death of malls and brick and mortar retail.

"What I don't understand is that online sales of sporty footwear and associated goods did not explode either in Europe or Asia."

All non-U.S. countries including Canada lag behind the U.S. in online shopping in general. But how long will that last?

[Andreas Hopf]

Online retail has recently, after 20 years, only reached around 10% of retail.

This makes me think that regarding FL something else is afoot (athleisure trend in decline, wrong brands, missing brands, wrong price points, etc.). After all, the Christmas quarter should always come out well.

[zubbub]

This brief article won't do much to convince sceptics. The author gives cursory mention of direct selling by manufacturers, but the point is that there is direct selling combined with online selling. For years many of us thought FL was immune to the Amazon juggernaut, but some 20 year olds have convinced me otherwise. When I asked if they are not afraid to buy shoes online without first tryiing them on, they replied: We do try them on. We go to Foot Locker or another retail store, and try on shoes until we find the ones we want, and then we order them online. That is a trend one may expect to go in only one direction, the opposite of FL's sales.

[Andreas Hopf]

What's known as "showrooming" is indeed a threat. Not only to FL but all retailers. What I don't understand is that online sales of sporty footwear and associated goods did not explode either in Europe or Asia.

So, where are the sales occurring? If neither FL nor online channels capture the sales, are athleisure sales declining across the board? Could it be that the ever fattening youth is spending their money for other items or in other product categories?

Athleisure trend coming to an end?

[rodolfoavalos1]

This would make sense if the prices were different between online and B&M. Aren't the prices supposed to be the same to eliminate this showrooming situation?

[Andreas Hopf]

They should be, when sold by legitimate online retailers. But maybe in the U.S. it's different?

Here, companies try to crack down on illegitimate merchandise and unwarranted discounts, but of course Amazon and Ebay are hard to deal with, even for major corporations, compared to regular online retailers.

[tuckjam]

I didn’t know you could buy Jordan’s on amazon. Lol

[Clauser1960]

Buy the dip? You must be really joking, FL is dead, killed by Amzn. I have been saying that over one year, and I was right. My only complaint is that I did not short it.

[bmcnamara70]

Short it now. Killed by Amazon? Really? Do they even sell the same products? Do a little research before you spout off nonsense.

[KennethNoisewater]

What about the divvy, is it safe?

[bmcnamara70]

Is it safe?? Of course it is. They just increased it 11% 2 weeks ago. This business generates a ton of cash and they’re net cash on the balance sheet.

[rodolfoavalos1]

There’s no need to buy right now, I’d rather confirm a “show me the trend reversal” in order to buy. Who knows how far this knife will fall. On the other hand, trading the stock might be a better option due to increased volatility..

[peterhk]

I bought the dip once on , no thanks

[Cambridge STR]

FL could drop much, much more.

[Chilled]

By the way malls had great traffic this holidays, l guess people skipped the FL.

[bmcnamara70]

Please provide data to backup your argument.

[Chilled]

I am sorry but I do not see it. The FL "experience" does not add value to the consumer. No need to make the trip and pay more.