Foot Locker (NYSE:FL) shares have sold off in recent months due to concerns about structural headwinds and lowered Q4 guidance. Although some concern is warranted, we believe that market pessimism is overblown given the company's healthy financial position, solid performance in recent quarters, and healthy financial position.
Business Overview
Foot Locker is a mall-based footwear and sportswear retailer that operates 3,174 stores in 27 countries. The company sells athletic footwear and apparel through a number of brands, which include Foot Locker, Lady Foot Locker, Footaction, Champs Sports, and Runners Point. The bulk of the company's physical stores are located across North America and Europe. FL also sells direct-to-consumer (DTC) via its website.
90 percent of FL's merchandise is sourced from five suppliers, Nike (NKE) being the largest (page 3 of 10-K). Nike products accounted for 66% of FL's merchandise selection in 2018.
Financial overview (in millions USD)
Shares Outstanding (in millions) | 110.5 |
Share Price | 39.23 |
Market cap | 4,334.9 |
Debt | 122.0 |
Cash | 744.0 |
Enterprise Value | 3,712.9 |
(TIKR)
Reasons for Share Price Weakness
There are several reasons why investors are currently pessimistic on Foot Locker. We'll list these below and provide counterarguments for each.
Nike and Adidas DTC Efforts
Nike and Adidas have invested heavily in their own DTC channels in order to gain more control over sales and marketing, as well as cut out the middleman.
Nike, for example, generated 31.6% of its revenue in fiscal 2019 through its Nike Direct segment, compared to 30.2% in 2018 and 28.2% in 2017 (page 27 of 10-K).
The benefits of DTC are numerous for sportswear companies like Nike and Adidas: selling directly to consumers leads to higher gross margins since the company does not have to provide discounted merchandise to third parties; DTC leads to more customer data that can be
