The past year and a half has provided a lot of interesting case studies not only in how corporations have evolved to survive and get by, but also in how consumer behaviors and trends have shifted. 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 was a shift in consumer focus towards health, wellness and fitness. I suppose that, given the constant messaging about personal cleanliness, getting vaccinated and more, it shouldn’t be that surprising to see people 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. Based on my own personal observation in my own little corner of the world, that seems to mean that even as the economy reopens and gyms are picking up capacity, people are also 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, which had been challenged by an increasing emphasis on e-commerce and direct-to consumer initiatives, generally remains significantly below pre-pandemic levels, which has put a lot of emphasis on these companies’ ability to rely on omnichannel marketing and distribution systems.
E-commerce has been one of a few different headwinds FL has been dealing with for a few years and has been lagging its competitors and even its suppliers. That includes big names like Nike Inc. (NKE) who are publicly working to drive direct-to-consumer relationships over traditional retail partners. FL’s intense capital investments in omnichannel marketing, sales and delivery have finally started to show positive growth in e-commerce in the past year, while management also put a lot of effort (and investment) into leveraging inventory management systems and supply chain management to increase productivity and efficiency.
While many of the headwinds that pre-date the pandemic – decreasing mall foot traffic, supplier investments in direct-to-consumer marketing channels – will continue to present challenges, management’s efforts to develop their own omnichannel marketing programme and improve inventory and supply chain systems have helped FL improve a very solid fundamental profile consistently throughout the past year. The stock itself has nearly tripled in value over the past year, sitting right just a little below its May, 52-week high at around $67. The interesting part of the story is that, even with the stock’s increase, the company’s fundamental strength suggests there is room for more.
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 $6.4 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased more than 392% (not a typo), while revenues more than 83%. In the last quarter, earnings were nearly 26.5% higher, while sales declined -1.64%. The company’s margin profile has been improving throughout the past year, and continues to get stronger; Net Income as a percentage of Revenues over the last twelve months was 7.45%, and 9.38% in the last quarter. While many analysts dismiss FL (primarily due to its reliance on traditional stores and mall traffic) I think the consistent improvement in its Net Income pattern under difficult conditions this year is strong confirmation that the company’s investments in digital channels and improved internal systems are bearing fruit.
Free Cash Flow: FL’s free cash flow is very healthy and growing, at $1.4 billion over the last twelve months and which translates to a Free Cash Flow Yield of 22.36%. This number also marks a big improvement over 2020 numbers from a year ago, when Free Cash Flow was $787 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 over $1.9 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 earlier this year. That translates to a yield of 1.3% 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 $78 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 25% right now. It is also worth noting that at the beginning of this year, my analysis offered a target price at around $67 per share.
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 $26.50 in early August last year to its peak last month at around $67; it also serves as the baseline for the Fibonacci retracement lines on the right side of the chart. After retracing from that high, the stock found support at around $57.50 to hit immediate resistance at around $64. This week the stock established new, higher current support at at around $60.50. A push above $64 should see the stock retest its 52-week high at $67, while a drop below $60.50 could have downside to $57.50.
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 or are willing to concede. If you prefer to work with short-term trading strategies, you could use a push above $64 as a signal to buy the stock or work with call options, with an eye on $67 as a bullish target. If the stock drops below $60.50, consider shorting the stock or buying put options, with an eye on next support at $57.50 for an exit point on a bearish trade.