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Why Foot Locker Is Getting Smashed

Mar. 04, 2018 12:40 PM ETFoot Locker, Inc. (FL)26 Comments


  • Foot Locker shares are getting slammed due to the perceived weakness in operations.
  • The valuation after this selloff is rather compelling particularly for dividend growth investors.
  • Comparable sales were weaker than we anticipated, but it is the back half of 2018 that you need to watch for, based on our expectations.
  • There are a number of risks to the company that could impact comparable sales.

Foot Locker (NYSE:NYSE:FL) is getting slammed after its recently reported earnings. We are compelled to respond today because we are of the opinion that the results are not as dire as the selling would imply, and expectations for a strong second half of 2018 are being ignored.

We will make comparisons relative to what we projected and were looking for in 2018. We will start by discussing valuation, which we feel is cheap, to be it plainly. We shall describe what we perceive as the impetus for the selling. Specifically, we are going to discuss sales, and hone in on what we feel was the weakest component of the report, comparable sales. Finally, we discuss what it is we believe investors should be looking for on this vital metric going forward, in conjunction with ongoing risks, and how that impacts our long thesis.

Valuation after this selloff

At the time of this writing, shares are down 16.5% to $38.30. Just one month ago, shares were comfortably back above $50:

Source: Yahoo Finance

The market is nervous, and that is the result of some of the items we will discuss momentarily. That said, it is hard to argue against the fact that the stock is still cheap. With very little debt, and trading at both a trailing-twelve month, and future-twelve month price-to-earnings ratio below 10 and an enterprise value-to-EBITDA ratio of 5, Foot Locker appears to offer value. The market is baking in risk that the company will fail to execute right now.

That said, investors are being paid to wait. The perceived risk that investors see has priced the stock at a discount which we now see as more attractive considering the company just raised its dividend again The stock is attractive to dividend growth investors as the company has

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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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Comments (26)

Comparing Skechers to Foot Locker is the definition of apples to oranges! What’s the ASP of a Skechers shoe?
rodolfoavalos1 profile picture
.. and that’s exactly one of your fundamental problems with FL. The ASP of their products. I love it when people can’t recognize such a simple trend on what people prefer nowadays (better price at a reasonable quality). Good luck to you as well, we’ll talk when this is in the low $30s if not less..
Haha, what’s SKX’s market share in the US? 2%? But that’s what everyone wants?! And how were SKX’s comps before this low-quality recovery? Love these ‘growth’ stories off low bases. They sold 2 pairs of shoes last year, and sold 3 this year, so they’re up 50%! Lol.. oh and btw, if you think FL is a low 30s stock, why did you ever buy it at 28 and own it til 43 (allegedly).
rodolfoavalos1 profile picture
The point is to make money, regardless if you’re making it on a 2% market share company or a 98% one.. I hope you don’t ever forget that, you’re going to need it.
rodolfoavalos1 profile picture
I agree that wholesale retail for FL is not entirely dead or doomed for eternity, but I also think FL now becomes again a “show me story” and until then, there will be distribution in the shares, and as such, given the increased volatility, I’d wait for a better entry point or do some trading in the interim.
So 9x isn’t cheap enough? When comps inflect later this year, this stock should approach $60.
rodolfoavalos1 profile picture
Not if margins deteriorate and/or SSS comps do not inflect. You get another bad surprise next qtr and 9x won’t be cheap enough, that I guarantee you. And this is on top of almost every other retailer having had a great holiday season or an inflection point. So add it all up and we are talking about a better entry point in the stock price. FL is a good business but is going thru a bit of a headwind.
You’re comparing apples to oranges. These retailers who had great holiday seasons are lapping years of negative comps. What comps did Macy’s — who had a ‘great’ holiday season — lap? -4%... what comps did FL just lap? Oh right, +5%. You buy retailers when comps get easier, not harder, provided there’s a strong possibility they’ll mean revert. So Nike’s stock is starting to price in an inflection point in North America, right? But FL, Nike’s largest wholesale partner (20% of NKE’s N.A. wholesale revenues) won’t benefit? Can’t wait for the DTC/Amazon argument.
mlb40 profile picture
This article should include pricing information comparing FL's prices with those published by Amazon and the manufacturer, e.g., Nike direct. How much must FL decrease prices, if any, (%), margins and profits to compete directly on price. The author states that customers might prefer to try shoes on rather than to purchase them on line. However, this advantage is minimized by Amazon's and Nike's generous product return policies. A key issue relates to quantifying the cost to the customer of buying shoes in a FL store rather than directly from the manufacturer (Nike) or from Amazon. I am long in FL, but feel that there is an element of wishful thinking in this article - is looks hurriedly written.
Quad 7 Capital profile picture
Why would anyone want to wait 7 days to get things right and deal with the hassle of packaging and waiting more time? Sure, some will, But it is why we believe clothing is one area Amazon will not dominate.

Pricing issues---Amazon takes losses in many cases, or it used to, to build its brand and shutter the competition. Margins are beginning to be sacrificed to bring customers back to foot locker; they are being very aggressive
Prices are at parity. Amazon does not get the allocation of product that FL does. This is why comps were weak. Nike (68% of FL merchandise) flooded the market with inventory a couple of years ago and has had to deal with inventory overhangs in the marketplace since. They’ve learned from their mistakes and are creating scarcity again... Nike is slowly commercializing its new launches. Epic React – which was introduced globally just 10 days ago – has gotten rave reviews but will likely be released slowly.
Quad 7 Capital profile picture
Yes, great point
Green Elmo a.k.a. User 48289781 profile picture
Why go to a mall store, when you can order direct from nike.com?
Quad 7 Capital profile picture
That is certainly a challenge. We do believe sneakers have SOME insulation to direct sales because many like to try them on and get the feel right. Foot Locker's market is not the guy who buys the same pair of shoes once a year.
And go through the return hassle.
Malls had record traffic. FL was passed by.
Quad 7 Capital profile picture
Please provide a data link for this statement
It is personal opinion. No data.
Haha, a personal opinion? Based on the one mall in your town? Back up your arguments with data.
Quad 7 Capital profile picture
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