Foot Locker is cheap but is it worth a buy?
Opdateret: 1. maj
Foot Locker's stock has lost more than half of its value since May 2021 and Foot Locker is now trading below their book value. It indicates that Foot Locker is now cheap but just because it is cheap, it doesn't necessarily mean that it is worth a buy. In this analysis I will share my thoughts on Foot Locker and decide if it is a buy or not for me.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that at the time of writing this analysis, I do not own shares in Foot Locker. If you would like to know what I have in my portfolio, or you want to copy it, you can read how to do so here. I don't have much opinion about Foot Locker, I have bought some shoes in their stores but that is the only relationship I have with the company. As always, I will try to keep this analysis objective.
Foot Locker was founded in 1974 and is an American footwear and apparel retailer that operates 2.858 retail stores in 28 countries across North America, Europe, Asia, Australia, and New Zealand. In addition to these retail stores, they also have 142 franchised Foot Locker stores located in the Middle East and Asia. They also operate websites and mobile apps. Besides the well-known Foot Locker shops, they also own other brands: Kids Foot Locker, Champs Sports, Eastbay, atmos, WSS, Footaction and Sidestep. Over the years, I believe that Foot Locker has gained a brand moat through their many shops and history.
Their CEO is Richard A. Johnson. He joined Foot Locker in 1993 and held many different positions until he became the CEO in 2014. The most well-known company that he has experience from before joining Foot Locker is General Motors. He holds a Bachelor of Arts from University of Wisconsin - Eau Claire. Besides his role in Foot Locker, he also serves on the boards of H&R Block, the Retail Industry Leaders Association (RILA) and the Footwear Distribution & Retailers of America. Under his leadership the strategy for Foot Locker is to be seen as a center of youth culture, which would differentiate them from other sneaker shops, and strengthen their brand moat. According to comparably, his employee ratings give him a score in the top 25 % of similar sized companies, which indicates that he is well-liked by his employees. In 2022 he got voted to serve as chair in RILA, which indicates that he is well-respected in the sector. His credentials within the sector, not only from Foot Locker, but also from the different boards. combined with him wanting to strengthen the moat of Foot Locker means that I feel rather confident in the management.
I believe that Foot Locker has brand moat. I'm confident in the management as well. Now let us investigate the big five numbers to see if Foot Locker does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. I'm quite impressed with the numbers as they are consistently above the required 10 %. I don't usually worry too much about one benchmark being below the others, but the 1-year benchmark does stick out as an outlier. However, it is still above the requirement, but it is something worth monitoring moving forward.
The next numbers we will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. Here Foot Locker underdelivers, and it seems like it is getting worse benchmark over benchmark. The sales growth rate is not necessarily the most important of the growth rates, but it is not encouraging to see that it is well below the requirements in each benchmark and getting worse.
The next numbers are the EPS Growth Rates. Again, the numbers are underwhelming. They are also very mixed as we have positive numbers in some benchmark and negative numbers in others. As mentioned previously, I'm not necessarily concerned with one benchmark, but last year's number is very bad, and it isn't something that you would like to see moving forward.
The Equity Growth Rate is also known as the most important of the four growth rates. Foot Locker delivers on the latest benchmark but underdelivers in the others. However, in difference to the first two growth rates, we do not see any negative numbers, and it is encouraging to see the numbers growing benchmark over benchmark since the 7-year benchmark.
Finally, we investigate the Cash Growth Rates. These numbers are a mixed bag. We have a fantastic number in the latest benchmark, while the two oldest are above the requirement of 10 %. The 3-year benchmark is pretty much on pair with the requirement as well, while the 5-year benchmark is a bit underwhelming. Personally, I would feel numbers like these acceptable, but I don't expect us to see numbers like last year moving forward.
To shortly summarize the five numbers from Foot Locker. The most important number is always the ROIC, and Foot Locker delivers a ROIC that is above the requirement in all of the benchmarks, which is very encouraging. The cash growth rate is overall acceptable despite being a bit under the requirement in some of the benchmarks. The equity growth rate is underwhelming but in no way catastrophic, and it seems like it is growing benchmark over benchmark. The EPS growth rate and sales growth rates are much below what we would like to see. Personally, I believe that the good ROIC is enough to make up for some of the other numbers, meaning that the historical numbers don't turn me away from an investment in Foot Locker. It is important to stress that this numbers are historical and do not necessarily reflect the business moving forward. They just give some perspective of the performance of the business historically.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculations on Foot Locker, it shows a debt that can be paid off in 0,02 years. Hence, Foot Locker do not have any debt, which is very nice to see.
Like with all other companies, there are some risks you need to consider, if you are going to invest in Foot Locker. The most obvious risk is that Nike will focus on direct-to-consumer sales. Approximately, 68 % of all merchandise purchased by Foot Locker in 2021 was from Nike. Hence, Foot Locker has been very dependent on Nike, and while management says that "we will continue to be strong, strategic partner of Nike's, and we are working on building complementary strategies to the direct to consumers growth", it is something that will hurt Foot Locker, especially in the short term. Supply Chain shortages, freight prices and higher wages. These are three different short-term risks, but I have combed them together, as they are all something that will affect Foot Locker, and in their latest earnings call, they mentioned that it will hurt margins and that they expect their margins to decline by 410 to 430 basis points in 2022. Macroeconomics. The performance of Foot Locker is subject to global economic conditions. If there are tighter credit, negative financials news or declines in income, customers will spend less of their money in Foot Locker. The same goes with increased fuel and energy costs, higher interest rates and lower home values. All things we could possibly see in the foreseeable future.
It isn't all risks, there are also a lot of potential for Foot Locker moving forward. Foot Locker is cheap. Their book value per share is $32,27, which is above the current share price (it might have changed when you read it). Their board has approved a quarterly dividend of $0,4 per share, which currently is around a 5 % yield. They are also doing a $1,2 billion share buyback. Recent acquisitions will grow their business. Foot Locker recently bought WSS and atmos. And while WSS contributed with $139 million and atmos with $49 million in sales in the fourth quarter in 2021, they expect to grow the businesses significantly. They expect WSS to reach $1 billion in sales by 2024 and grow atmos by 50 % to $300 million over the next 3 years. Focusing on apparel. They are growing their apparel business, and it grew by 30 % in the fourth quarter in 2021 and reached $1,4 billion in sales for the first time ever. They have introduced their own private labels in LCKR their new menswear line and Cozi their new womenswear line. Growing their reward program. They have now rolled out their FLX reward program in Europe as well and will continue to roll out the program in other countries. On an annual basis they had a 50 % growth in active members, and at the same time the difference between member and non-member spend has increased as well.
All right, we have gone through the numbers, potential and risks regarding Foot Locker, and now it is time for us to calculate a price for Foot Locker. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS at 3 (which is below the guidance of above 4). I chose an Estimated future EPS growth rate of 7 (which is lower than what analysts expect but one I feel comfortable with), Estimated future PE 14 (it is the highest historical P/E) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $20,42, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy Foot Locker at price of $10,21 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financials, keep in mind that all numbers are in millions. The operating Cash Flow last year was 666. The Capital Expenditures was 209. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 146,3 in our further calculations. The Tax Provision was 348. We have 96,09 outstanding shares. Hence, the calculation will be like this: (666 - 146,3 + 348) /96,09 x 10 = 89,54 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". The free cash flow per share last year was 3,93 but I don't believe that to be sustainable. Hence, I have decided to cut it to 2,8 With the Free Cash Flow Per Share at 2,8 and a growth rate of 7 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $30,74.
Foot Locker is cheap at these levels. Personally, I would see a larger moat when I invest in a company. Nevertheless, there are some risks and potential you need consider when investing in Foot Locker. No doubt that the fact that Nike will focus on their own direct to consumer sales will hurt Foot Locker, as they have been very dependent on Nike previously. The question is if they diversify enough from Nike and grow other business to make up for the loss. There are other things not mentioned in this analysis such as them enhancing their omni-channel and making cost saving programs that should save them $200 million annualized. Their business will be challenged in the short-term due to what is mentioned in this analysis but if you believe that the management will execute on their new strategies and is happy in receiving a dividend yield of 5% while waiting, it could be worth a buy below the PAYBACK Time price of $30,74. Personally, I will probably look elsewhere, as I think there are too many uncertainties.
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