For the past year, one of the most interesting storylines has been 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 indefinite period of time, which 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 trend that has impacted companies in the Specialty Retail industry is a shift towards health, wellness and fitness. I don’t think the trend is all that surprising, given the non-stop focus around cleanliness to limit virus spread and demographic information about those most susceptible to COVID’s most dangerous effects. That should normally prompt people to focus more on what they can each do to boost their own immune systems to stay healthy; it also piques interest 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, and even now those gyms continue to operate on a restricted basis. That means 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 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 – reports continue to indicate that foot traffic at most of these locations remains 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 has seen positive growth in e-commerce, but according to industry analysts digital penetration continues to run about 16% below the retail average, while competition is increasing from its suppliers. Along with these challenges is the very real impact of COVID; FL has always been highly dependent on enclosed mall traffic, which continues to be impaired. In fact, FL’s CEO has used the company’s latest earnings calls to point to near-term, expected store closures to act as an ongoing drag on results. These are headwinds that fly directly in the face of some interesting fundamental indications of strength, the stock itself has also shown a lot of strength, following a sustained upward trend over the past year to hit 52-week high just about a week ago at nearly $60 per share. Does that mean FL is a smart bet for a contrarian-minded investor, or just a stock trading at too high a price to justify a long-term bet 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 slid a little more than -1.44%. In the last quarter, earnings were much higher, increasing nearly 28.1%, while sales increased just 3.94%. The company’s margin profile is narrow, but is showing useful signs of improvement; 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 for the entire past year is a good indication that the company’s investments in digital channels are starting to bear fruit.
Free Cash Flow: FL’s free cash flow is very healthy, at $903 over the last twelve months and which translates to a Free Cash Flow Yield of 14.93%. This number also marks a big improvement over a year ago, when Free Cash Flow was just $70 million.
Debt to Equity: FL’s debt/equity ratio is 0, which reflects the fact that the company carries just $8 million of long-term debt. For contrast, consider than this number was more than $2.8 billion for the last quarter of 2019. Cash and liquid assets are very healthy, at almost $1.7 billion. Their robust balance sheet, with very low debt is a big indication of strength and marks an increasing sign of strength under current market and economic conditions.
Dividend: FL’s annual divided is $.80 per share, which translates to a yield of 1.38% at the stock’s current price. It is worth noting that FL cut their dividend in 2020 from $1.52 per share in an effort to help preserve cash and boost their balance sheet, but reinstated it after just a single quarter and increased it from $.60 to $.80 per share, per annum in the last quarter.
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 $67.50 per share. That suggests that even with the stock’s increase over the past year, it still offers a useful discount, being undervalued by about 18% 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 upward trend over the past year to its recent peak at around $60; it also serves as the baseline for the Fibonacci retracement lines on the right side of the chart. The stock has retraced a bit from that high point, and appears to be approaching support at around $57. A drop below $57 should see the stock find next support at around $54, while a push above $60 would be expected to find next resistance at around $63.
Near-term Keys: FL has a lot of interesting elements working in its favor as a potential value play, which means that as a long-term opportunity it could be hard to ignore. I think there is a risk the stock could see some near-term volatility, with potential downside if the market’s broad momentum turns bearish; but if you’re willing to be patient, this could be a very useful 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 and seem to continue to believe. If you prefer to work with short-term trading strategies, you could use a push above $60 as a signal to buy the stock or work with call options with an eye on $63 as a bullish target. If the stock drops below $57, consider shorting the stock or buying put options, with an eye on next support at $54 for an exit point on a bearish trade.