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Foot Locker – Buying the dip in equities

Is the footwear company a good fit for your portfolio?

Photo: Shutterstock

Photo: Shutterstock

About the Company

Foot Locker is a leading global athletic footwear and apparel retailer, which caters to the sneaker enthusiast. Its stores offer the latest in athletically-inspired footwear and apparel, manufactured primarily by the leading athletic brands. Foot Locker provides the best selection of premium products for a wide variety of activities, including basketball, running, and training.

Investment Rationale

We maintain our Buy recommendation with a price target on Foot Locker of $75 per share.

Shares of Foot Locker have fallen after analysts started to worry that the Company wouldn’t be able to reach its goals for 2017. I believe this negativity is more than being priced in and the shares are now trading at attractive levels. The shares are trading on a P/E of 11x compared to their historical average of 15x. Based on 2018E earnings of $5.17 and assuming that the Company will get back on track, we expect the shares to trade at $75 per share.

Investment Rationale

Shares of Foot Locker have fallen after analysts started to worry that the Company wouldn’t be able to reach its goals for 2017 for the following reasons:

• Sales of Nike footwear, which account for more than 66% of Foot Locker’s revenue, have softened after strong 5-year run
• Nike inventory is running high
• Management are also seeing weak results in direct-to-consumer business (which account for 13% of revenues), with the result of the Company having been forced to cut prices on web site
• Prospects for weaker near-term sales, operating margins, EPS growth warrant below-average multiples

However, after a management telecom by analysts, the outlook was not as bleak as one interpreted from the results. Management’s tone was clear confidence that the low-single-digit run-rate is more transient driven by product flow timing with the combination of innovation, greater depth in key styles, and experience rather than “cycle” driving a return to mid-single-digit top-line growth citing no changes to the medium (2H17) or long-term (FY18+) outlook.

Management have also said that if they do continue to see weakness in their top line revenue, they will revert to cost saving measures in order to maintain margins. Although this is not an idea scenario, one must also look at the level we are trading at today.

We remain confident in Foot Locker and see the current price as a good entry point.

Conclusion

We are comfortable holding Foot Locker in a well-diversified portfolio. It is well positioned to continue to benefit from further growth as global economic growth continues to remain supportive.

Our optimism at this stage is expecting that Nike’s product pipeline will improve as the year progresses and knowing that Foot Locker has a long track record of impressively managing expenses.

Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

 

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