- 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 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.
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%.
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.
This article was written by
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.
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