FL is up more than 23% in the last month. Where is its value price?

One of the basic concepts a lot of successful investors have used to find useful investments is to start by looking around their house. Regular household items, including what you wear, can offer an interesting outlet to find practical investments, often at useful, discounted prices.

One of the trends that I’ve followed with interest for past two or three years is the general shift towards personal health and well ness that saw a boost in 2020 and 2021 from the pandemic. That includes fitness and exercise. 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, even as many people are going back the gym, others 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 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 brick-and-mortar stores and malls, which have 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 specific reliance on NKE to stock its inventory has been signaled as a risk element, and for some have overshadowed FL’s intense capital investments in omnichannel marketing, sales and delivery that finally began to show positive growth in e-commerce in 2021, 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 FL’s difficulties that pre-date the pandemic – decreasing mall foot traffic and supplier investments in competing, direct-to-consumer marketing channels – continue to present challenges, management’s efforts to develop their own omnichannel marketing programme and improve inventory and supply chain systems helped FL improve a very solid fundamental profile consistently through 2020 and 2021 and build a fortress-level balance sheet. The stock itself more than doubled in value during that time, driving from around $31 in October 2020 to a peak in May 2021 at nearly $67. Since then, the stock has dropped into a downward trend that bottomed in July of this year at around $24 per share. Since then, the stock has reversed and started a new upward trend, pushing to about $40 at the end of last week and how just a little below that point as of this writing. The question at this stage, however is whether the company’s fundamentals support the stock’s big bullish move to finish the year, or has it passed the point of useful value? Let’s find out.

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 $3.6 billion.

Earnings and Sales Growth: Over the last twelve months, earnings declined more than -34%, while revenue growth was flat, but negative at -0.73%. In the last quarter, earnings were 15.45% higher, while sales grew by 5.23%. The company’s margin profile had been showing impressive improvement through most of 2021, but has weakened through most of this year; Net Income as a percentage of Revenues over the last twelve months was 4.87%, and tapered to 4.42% in the last quarter. I believe these declines are, at least in part, attributable to supply chain shortages and challenges that have persisted as a plague to multiple sectors and industries throughout the pandemic, and have been exacerbated by rising inflation and geopolitical concerns this year.

Free Cash Flow: FL’s free cash flow has deteriorated over the last year, from $714 billion to -$4 million six months ago, and -$68 million in the last quarter. This is a big red flag for me that would need to see improvement in the quarters ahead in order for the company to continue to service its debt, maintain its dividend, and invest in its business.

Debt to Equity: FL’s debt/equity ratio is .14, which is very low and marks a conservative approach to leverage. The balance sheet shows $448 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 have declined sharply in the last year, from $1.4 billion a year to $386 million in the last quarter. The debt is still manageable, however the inflationary conditions I described above have clearly had a negative effect that should give any investor pause.

Dividend: FL’s annual divided was $.60 per share at the end of 2020, but was increased to $.80 per share in early 2021, $1.20 at the end of the third quarter, and $1.60 earlier this year. That translates to a yield of 4.08% at the stock’s current price.

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 $17 per share. That suggests that the stock is overvalued by about -56% 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 decline from its January peak at around $47.50 to its July low at around $24; it also serves as the baseline for the Fibonacci retracement lines on the right side of the chart. The stock reversed that downward trend almost immediately after finding bottom, and pushed above the 61.8% retracement line at the end of November to find immediate resistance at around $40 just last week. That puts current support at around $38 where the 61.8% retracement line sits (previous resistance becomes new support). A push above $40 should have near-term upside to about $42, based on pivot activity at the start of 2022, with room to about $45 if buying activity accelerates. A drop below $38 should find next support at around $35.50 based on a pivot low in early September that also lines up with the 50% retracement line.

Near-term Keys: FL’s current bullish momentum have clearly outpaced the stock’s value price, which along with an increasing number of fundamental concerns are strong reasons FL really can’t be considered on any kind of strict valuation basis right now. If you prefer to focus on short-term trading strategies, the stock’s current price activity could offer some useful signals. Use a break above $40 as a signal to consider buying the stock or working with call options, using $24 as a practical profit target. if the stock drops below $38, you could consider shorting the stock or buying put options, with $35.50 offering a useful, quick-hit profit target on a bearish trade.

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