Over the past year, it’s been interesting to see not only how corporations have evolved to survive and get by, but also how consumer behaviors and trends have adjusted as well. Broad-based shutdowns that shuttered businesses all over the U.S. at the beginning of the pandemic sent people home for an unknown future. That move forced much of corporate America to shift to remote, work-from-home operating models. On a consumer level, it also prompted families to start stocking up on basic household goods and food storage.
Another interesting effect of shutdowns and self-isolation requirements is a shift in consumer focus towards health, wellness and fitness. The emphasis on health and wellness isn’t surprising, given the non-stop drumbeat around cleanliness to limit virus spread and demographic information about those most susceptible to COVID’s most dangerous effects; nor is it surprising that constant messaging also prompted people to focus more on what they can individually do to boost their own immune systems to stay healthy.
I think the fitness aspect of the shift is also interesting from an investor standpoint. For most of us, exercise usually means going to the gym where we can find all of the equipment needed to pick and choose what to do in any given day. The early stages of the pandemic shuttered gyms all over the country along with everything else, with gradual reopenings restricting normal operations – in some cases, enough to encourage even the hardiest of workout warriors to rethink the way they approach their fitness. Based on my own personal observation in my own little corner of the world, that seems to mean that more and more, people are working out at home, and going outside to run, walk or ride. Some of this shift is being seen in the sales numbers over the last few months for many apparel and shoe manufacturers, and even in sales at retailers, including big-box stores and specialty shops like Foot Locker (FL).
That doesn’t mean that these businesses are out of the woods – foot traffic at most of these locations generally remains significantly below pre-pandemic levels, which has put a lot of emphasis on these company’s ability to rely on omnichannel marketing and distribution systems. That especially means e-commerce. Prior to the pandemic, e-commerce was one of a few different headwinds FL was dealing with, along with a general push among its biggest suppliers like Nike Inc. (NKE) to drive direct-to-consumer relationships over traditional retail partners. FL’s intense capital investments in omnichannel marketing, sales and delivery finally started to show positive growth in e-commerce. They also put a lot of effort (and investment) into leveraging inventory management systems and supply chain management to increase productivity and efficiency. All of these efforts helped provide productive counters to the challenges imposed by a global pandemic, which will continue to provide headwinds management has already been contending with, including enclosed mall traffic, which continue to be impaired, and efforts by brand partners like Nike, Under Armour and others investing in direct-consumer marketing channels. Even so, FL boasts a very solid fundamental profile. The stock itself has nearly quadrupled in value over the past year, sitting right just a little below its March, 52-week high at around $59.50. Does the stock’s bullish trend make FL is a smart bet for a value-minded investor, or an unwarranted risk under current conditions?
Fundamental and Value Profile
Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates through two segments: Athletic Stores and Direct-to-Customers. The Company is an athletic footwear and apparel retailer, which include businesses, such as include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep and SIX:02. The Direct-to-Customers segment is multi-branded and sells directly to customers through Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the Websites for eastbay.com, final-score.com, eastbayteamsales.com and sp24.com. Additionally, this segment includes the Websites, both desktop and mobile, aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, six02.com kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com and sidestep-shoes.com). FL has a current market cap of about $5.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings declined about -4.91%, while revenues decreased -1.44%. In the last quarter, earnings were much higher, increasing nearly 28%, while sales increased almost 4%. The company’s margin profile is narrow, but is strengthening; Net Income as a percentage of Revenues over the last twelve months was 4.28%, and 5.62% in the last quarter. While many analysts discount FL and its reliance on traditional stores and mall traffic, I think the improving Net Income pattern under difficult conditions this year is strong confirmation that the company’s investments in digital channels are starting to bear fruit.
Free Cash Flow: FL’s free cash flow is very healthy and growing, at $903 over the last twelve months and which translates to a Free Cash Flow Yield of 16.08%. This number also marks a big improvement over 2020 numbers from a year ago, when Free Cash Flow was $70 million.
Debt to Equity: FL’s debt/equity ratio is .0, which is very low and marks a conservative approach to leverage. The balance sheet shows $8 million in long-term debt in the last quarter, which is significantly below the more than $2.8 billion they reported for the last quarter of 2019. Cash and liquid assets are very healthy, at almost $1.7 billion. Their robust balance sheet, with next to no debt is a big indication of strength and marks a very interesting, positive shift under current market and economic conditions.
Dividend: FL’s annual divided was $.60 per share at the end of 2020, but was increased to $.80 per share in the last earnings report. The updated number translates to a yield of 1.41% at the stock’s current price. It is worth noting that FL cut their dividend at the beginning of the pandemic from $1.52 per share in an effort to help preserve cash and boost their balance sheet; but the fact they continued to pay a dividend where many companies chose to eliminate it altogether, along with the recent increase is also a sign of strength.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $67 per share. That suggests that even with the stock’s price performance over the last year, it still offers a useful discount, being undervalued by about 20% right now.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays FL’s price performance over the last year. The diagonal red line traces the stock’s rise from $19 in early April last year to its peak last month at around $59.50; it also serves as the baseline for the Fibonacci retracement lines on the right side of the chart. The stock is currently working in a strong consolidation range at the top of the upward trend, with support sitting at around $55 and resistance at $59.50. Given the distance between these levels, that suggests that a break above $59.50 should have upside to about $64, while a drop below $55 should find next support between $53 and $52.50. The strength of the upward trend should give the stock a lot of support to work off of, even if bearish momentum increases, with additional support levels at $50, $47, and finally $44 where the 38.2% retracement rests likely to prevent the stock from reversing quickly into a downward trend.
Near-term Keys: Even with the stock’s rise in price over the last twelve months, FL has a lot of interesting elements working in its favor as a potential value play, which means that as a long-term opportunity I think it is hard to dismiss. This is a stock that can pick up short-term volatility, but you’re willing to be patient, this could be a compelling long-term opportunity. I think the company’s fundamental metrics are a good indication that, while headwinds and challenges persist, FL is dealing with them better than many analysts predicted. If you prefer to work with short-term trading strategies, you could use a push above $59.40 as a signal to buy the stock or work with call options with an eye on $64 as a bullish target. If the stock drops below $55, consider shorting the stock or buying put options, with an eye on next support at $52.50 for an exit point on a bearish trade.