Foot Locker: Is this cheap stock worth buying?
Opdateret: 9. aug.
Foot Locker is a well-known brand, and its stock is currently trading below its book value. It indicates that Foot Locker is now inexpensive, but just because it is cheap, it doesn't necessarily mean that it is worth buying. In this analysis, I will share my thoughts on Foot Locker and determine whether it is a good investment 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 any shares in Foot Locker. If you would like to know what is in my portfolio or if you want to make a copy of it, you can find instructions on how to do so here. I don't have a strong opinion about Foot Locker. I have only purchased some shoes from their stores, so that is the extent of my relationship with the company. As always, I will strive to maintain objectivity in this analysis. If you want to purchase shares or fractional shares of Foot Locker, you can do so through eToro. eToro is a highly user-friendly platform that allows you to begin your investment journey with as little as $50.
Foot Locker was founded in 1974 and is an American footwear and apparel retailer that operates 2.714 retail stores in 29 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 such as Kids Foot Locker, Champs Sports, atmos, and WSS. Management believes that Foot Locker has a strong brand moat due to its 12 million Instagram followers, which is five times more than the combined number of followers of their top four competing third-party retail banners. Furthermore, a third-party study showed that Foot Locker's brand health index is 20% higher than the average of their peer set. Finally, their iconic brand positioning and strong customer base allow them to build scale with their vendors, which broadens their relationship with them. I tend to agree with management, and I believe that Foot Locker has established a brand moat, albeit a modest one, through their many years in the business.
Their CEO is Mary Dillon. She joined Foot Locker as CEO in September 2022. Prior to joining Foot Locker, she served as the CEO and a member of the Board of Directors at Ulta Beauty. She also has experience from companies such as McDonald's and PepsiCo. She also sits on the Board of Directors at KKK & Co, a global investment company. She holdsa bachelor's degree in Marketing and Asian Studies from the University of Illinois. To pay for her university tuition, she worked various jobs, such as being a waitress and a housecleaner, which demonstrates her diligent work ethic. In 2019, Mary Dillon was named one of Barron's best CEOs. While at Ulta Beauty, Mary Dillon managed to triple the company'smarket capitalization and double its revenue in 8 years. She is also credited with doubling the number of stores and loyalty members. I know Mary Dillon very well, as I used to own shares in Ulta Beauty. The reason I sold the shares wasthat Mary Dillon stepped down as CEO. Thus, I hold her in very high regard. The shares of Foot Locker surged 20% when she was announced as the new CEO, indicating that I'm not the only one who recognized her potential. Because she has only been the CEO of Foot Locker for a short period of time, we cannot make a fair judgment about her performance at the company. However, I have great confidence in her as a CEO, and I believe she is the right person to lead Foot Locker into the future.
I believe that Foot Locker has a brand moat. I also have a lot of confidence in the management. Now, let us investigate the numbers to determine if Foot Locker does indeed meet our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on invested capital, also known as ROIC. We want to see 10 years of history, and we want the numbers to be above 10% in all years. I'm quite impressed with the numbers until 2019, where Foot Locker consistently delivered a ROIC above 10%, and in some cases, above 20%. However, since 2019, Foot Locker has only managed to deliver a ROIC above the required 10% once. Of course, Foot Locker has faced challenges such as a pandemic and challenging macroeconomic conditions in fiscal 2023. Nonetheless, I would like to see Foot Locker improving their ROIC moving forward.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actualnumbers and the percentage growth year over year. The growth in equity has been consistently strong since 2014. There was a peak in 2017, and since then, it has dropped to the levels we saw before that. In fiscal year 2022, Foot Locker reached its highest book value + dividend ever, and it further increased in fiscal year 2023. Thus, these numbers look good, and hopefully, Foot Locker will manage to grow its equity moving forward.
Finally, we will investigate the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. Foot Locker has managed to maintain positive free cash flow in 9 out of 10 years. Unfortunately, last year was the year that Foot Locker had negative free cash flow, which is not a favorable sign for potential investorsconsidering investing in the company. Up until fiscal 2023, Foot Locker delivered a satisfactory level of free cash flow and levered free cash flow margin. It did decrease slightly in fiscal 2022, which was when Foot Locker acquired atmosand WSS. I don't want to dismiss Foot Locker as an investment solely based on the fiscal 2023 numbers. However, I would like to see Foot Locker return to a positive free cash flow in fiscal 2024.
Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings.Doing the calculations on Foot Locker, it shows a debt that can be paid off in 1,3 years. Hence, Foot Locker has an acceptable level of debt, and it is not something that I would worry about if I were invested in Foot Locker.
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 65% of all merchandise purchased by Foot Locker in 2023 was from Nike. Hence, Foot Locker has been heavily dependent on Nike. While management states that "we will continue to be a strong strategic partner of Nike's, and we are working on developing complementary strategies for direct-to-consumer growth," this reliance will likely have negative consequences for Foot Locker, particularly in the short term. Another risk is competition. In its annual report, Foot Locker describes the retail athletic footwear and apparel business ashighly competitive. Foot Locker mentions that they not only compete with other traditional retailers, but they also compete with online retailers and the direct-to-consumer channels of their merchandise vendor suppliers. I believe that Foot Locker has a strong brand that protects it against traditional retailers. However, they mention in their annual report that a rapid shift in customer buying patterns to online could have a significant negative impact on their business results.Furthermore, their merchandise vendors are likely to focus on direct-to-consumer sales, as these yield higher profitmargins. We have already seen it with Nike, and as a shareholder in Crocs, I know that they are also focusing on it. Macroeconomics. The performance of Foot Locker is influenced by global economic conditions. If there is tighter credit, negative financial news, or a decline in income, customers will spend less money at Foot Locker. The same goes forincreased fuel and energy costs, higher interest rates, and lower home values. All the things we could possibly see in the foreseeable future.
There are not only risks, but also a lot of potential for Foot Locker moving forward. Foot Locker is cheap. Their book value per share is $35,29, which is higher than the current share price (it may have changed by the time you read this).Their board has approved a quarterly dividend of $0,40 per share, which currently yields around 6%. Foot Locker is also conducting buybacks that management believes will increase EPS by a low single-digit percentage. Recent acquisitions will help grow their business. Foot Locker recently acquired WSS and atmos. And while WSS contributed $604 million and atmos contributed $188 million in sales in fiscal 2023, they expect significant growth for both businesses. Management expects WSS to reach $1,3 billion in revenue by 2026, which would mean a compound annual growth rate (CAGR) of more than 20%. Management expects atmos to reach $250 million in revenue by 2026, which would imply a compound annual growth rate (CAGR) of just below 10%. Expanding the sneaker culture. At their latest investor day, management discussed their plans to expand the sneaker culture by catering to a wider range of sneaker occasions, offering a greater variety of sneaker choices, and promotingmore distinct sneaker styles. Right now, the market penetration of sneakers in the total footwear market is 43%, and management expects it to grow to 47% by 2026. This is because sneakers are becoming more widely accepted for use on various occasions. Focusing on apparel. Foot Locker has introduced their own private labels in LCKR, their menswear line, and Cozi, their womenswear line. As these are private labels, they will have higher profit margins compared to brands from their merchandise vendors. As it is now, apparel and accessory sales account for 20% of Foot Locker's total sales. Apparel sales increased by low single digits in fiscal 2023, indicating that there is ample room for growth. Growing their rewards program. They have now launched their FLX reward program in Europe and plan to expand it toother countries. On an annual basis, they experienced a 50% growth in active members. Their reward program allows Foot Locker to capture consumer data in order to better meet the needs of their customers. It also incentivizes their customers to engage with their brand, as members of the reward program spend over 10% more than non-members.Management has mentioned that they want to maximize their program to attract a broader range of customers, better understand them, and serve them by leveraging their customer data.
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 of 3,58, which is from fiscal year 2023. I have chosen an estimated future EPS growth rate of 13 (which is the estimated growth rate provided by Finbox). Additionally, the estimated future PE is 26 (which is double the growth rate, as the historical PE for Foot Locker has been higher). Lastly, we have already established a minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $78,10. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Foot Locker at a price of $39,05 (or lower, of course) 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 173. The capital expenditures were 285. I tried to look through their annual reportto see how much of the capital expenditures were used on maintenance. I couldn't find it, though. As a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 199,5 in our further calculations. The tax provision was 180. We have 93,395 outstanding shares. Hence, the calculation will be as follows:(173 - 199,5 + 180) /93,395 x 10 = $16,44 in Ten Cap price.
The last calculation is the Payback Time. I also described in "MY STRATEGY". However, Foot Locker had a negative free cash flow in fiscal 2023. Thus, I will not be able to calculate the Payback Time price.
Foot Locker is inexpensive at these levels. Personally, I would like to see a larger moat when I invest in a company. Nevertheless, there are some risks and potential you need to 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 are heavily dependent on Nike. We will probably see other companies focusing on direct-to-consumer sales as well. It is something that Foot Locker will need to navigate through, and I don't think you could have better management to do so. I like that Foot Locker will focus on what they are best at, which is selling sneakers. However, I also believe that their acquisitions of atmos and WSS will be good for the company long-term. I believe that focusing on their loyalty program is also a good idea, as they will be able to leverage that data. Nonetheless, I would like to see Foot Locker achieve a positive free cash flow and deliver a higher return on invested capital (ROIC) before considering it as an interesting investment. However, if you are considering investing in Foot Locker, I believe that purchasing the stock below its book value per share at $35,29 would be a favorable entry point.
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