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Introduction: I had mentioned this company in a recent post (
link) and in a recent video I did (
link) as I know a lot of people have been talking about this. Also, this seems to be a fan favorite on the
valueinvesting subreddit. This company sells mostly footwear, but the possibility of buybacks may make this favorable for some.
TLDR: In true retail fashion, I am going to wait a couple of quarters/year to see if this business is truly worth investing in. I would feel more comfortable seeing how the suppliers' DTC strategy will hurt Foot Locker's overall business model. Currently, I think the business has more downside instead of upside.
If you would like to watch my Youtube video explanation click
here.
If you would like the article with pictures click the Substack link
here.
FL - FootLocker: “Foot Locker, Inc. leads the celebration of sneaker and youth culture around the globe through a portfolio of brands including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Eastbay, atmos, WSS, Footaction, and Sidestep. As of January 29, 2022, we operated 2,858 primarily mall-based stores, as well as stores in high-traffic urban retail areas and high streets, in 28 countries across the United States, Canada, Europe, Australia, New Zealand, and Asia, as well as websites and mobile apps. Our purpose is to inspire and empower youth culture around the world, by fueling a shared passion for self-expression and creating unrivaled experiences at the heart of the global sneaker community. Foot Locker, Inc. uses its omni-channel capabilities to bridge the digital world and physical stores, including order-instore, buy online and pickup-in-store, and buy online and ship-from-store, as well as e-commerce. We operate websites and mobile apps aligned with the brand names of our store banners including footlocker.com, kidsfootlocker.com, champssports.com, atmosusa.com, shopwss.com, and related e-commerce sites in the various international countries that we operate. These sites offer some of the largest online product selections and provide a seamless link between e-commerce and physical stores. We also operate the websites for eastbay.com and eastbayteamsales.com. ”
2021 10K Filing Foot Locker operates across various branded stores that focus primarily on footwear, but they usually have a selection of other apparel or accessories to go along with the brands that they sell (Nike, Adidas, Reebok, Jordan, Puma, etc.).
Foot Locker,
Kids Foot Locker, and
Lady Foot Locker are all part of the primary banner store and have seen some slight growth in store openings through their footwear sales.
Champs Sports focuses on selling athletic footwear and apparel within North American malls.
Footaction was another footwear store owned by Foot Locker that is now converting the remaining stores to the banner company and will close 41 of the unconverted stores.
Sidestep is more focused on athletic fashion footwear and they have stores in Germany, Netherlands, Spain, Belgium, Luxembourg, and Switzerland.
Eastbay is a sporting goods direct-to-consumer business that provides high schools and other athletes with sporting attire including footwear, apparel, equipment, and team-licensed merch.
WSS was a recent acquisition made by Footlocker in 2021 and the focus primarily on the Hispanic consumer demographic by operating off-mall stores in California, Texas, Arizona, and Nevada. Lastly, they acquired
atmos which is a Japanese-based boutique for premium footwear and has a large digital-based brand.
Foot Locker breaks itself down into the following segments: - Stores
- This refers to in-store sales
- Direct-to-customers
- This includes online sales and other catalog sales outside of the stores.
Revenue Segment Breakout Screenshot Financials: - Total Revenue TTM as of Q4 2021: $8.958B (Macrotrends is missing the most recent quarter, but I am leaving the screenshot so you can see the trend)
Revenue TTM Screenshot - Profit Margin was floating between ~4% - 7% before the pandemic happened. They saw a huge influx to their earnings from the stimulus and extra cash that many had. (Macrotrends is missing the most recent quarter, but I am leaving the screenshot so you can see the trend)
Gross Margin, Operating Margin, and Profit Margin screenshot - Current P/E: ~3.5
- This is due to the large influx in earnings throughout 2021. The forward PE on Tikr.com is just shy of 7x.
- EV/EBITDA: ~4.5
- Current Cash as of Q4 2021: $804M
- Total Debt as of Q4 2021: $457M
- Lease obligations: $2.935B
Current Debt Screenshot FCF Vs. Dividend & Share Repurchases Screenshot One of the interesting items I found on their 10K was the FCF versus the money being spent on dividends and stock repurchases. From the looks of it they are spending nearly all of the FCF on trying to give back to the shareholders which is nice and all, but they took out a loan due in 2029. I think that FL is beginning to use the debt in order to cover the cash being spent on the dividends and buybacks. While this may be beneficial I would definitely watch out for this.
Industry - According to McKinsey.com, “Travel has traditionally been a key driver of luxury spending, but international tourism is not expected to fully recover until between 2023 and 2024.” Also, the recovery will be uneven between all of the retailers and the ongoing supply chain issues. Many of the companies are having employee retainment issues on both the corporate and retail sides of the business. Now they did note that social shopping and the surge of social media use allows brands to connect to consumers at a more intimate level. McKinsey recommends that companies should double down on integrating the online shops with users' phones and apps in mind so that they build out data to find what their customers want. Lastly, I would like to point out that over the last year and a half we have had a lot of free money due to stimulus checks and the deferment of student loan payments. This gave many consumers a lot of free money to spend on whatever they may have wanted. While I do think people will still buy at retailers’ stores it is important to watch the consumers’ money supply and how much they have to spend on products. Part of this also comes from looking at the amount of credit the consumers are using.
- According to Grand View Research, “The global athletic footwear market size was valued at USD 127.3 billion in 2021 and is expected to expand at a compound annual growth rate (CAGR) of 4.9% from 2022 to 2030.”(Link) This seems to translate to the global footwear industry as well at least from what I was able to find.📷
Strengths: - Repurchasing Stocks
- “The Board has also authorized a new share repurchase program for the repurchase of up to $1.2 billion of Foot Locker, Inc.'s outstanding common stock.” (Earnings Release)
- “For full-year 2021, the Company repurchased 7.5 million shares for a total of $348 million and paid a total of $101 million in dividends.” (Earnings Release)
- Reinstating the dividend….for now
- “Further, the Board of Directors declared a quarterly cash dividend on the Company's common stock of $0.40 per share, a 33% increase from the prior $0.30 per share, back to pre-pandemic levels. The Dividend will be payable on April 29, 2022 to shareholders of record on April 14, 2022. The Board will continue to evaluate the dividend program on a quarterly basis. “
- Building out my diverse stores and outside of mall stores.
Risks: - In addition, all of our significant suppliers operate retail stores and distribute products directly through the internet and others may follow. Should this continue to occur or accelerate, and if our customers decide to purchase directly from our suppliers, it could have a material adverse effect on our business, financial condition, and results of operations.
- Nike decrease
- Some 70% of Foot Locker’s sales in 2021 were in Nike product, the retailer said in its 2021 public filings, and it is now saying no single vendor will account for more than 55% of its merchandise selection. For this fiscal year it will be about 60% of its merchandise purchases, the company said. - (link) Nike is moving to a larger direct-to-consumer approach with their own sales.
- Bad outlook by company management
Sales Change | Down 4% to 6% |
Comparable Sales Growth | Down 8% to 10% |
Square Footage Growth | Down 1% to 2% |
Gross Margin | 30.1% to 30.3% |
SG&A Rate | 20.2% to 20.4% |
D&A | ~$210 million |
Interest | ~$22 million |
Tax Rate | ~28.7% |
Non-GAAP EPS | $4.25-$4.60 |
Capital Expendiures | Up to $275 million |
Discounted Free Cashflow Model If you would like to see my worksheet the link is
here.
DCF1 Screenshot DCF2 Screenshot Closing Thoughts: The valuation may be looking favorable based on the assumption listed in the DCF above, but I do not think the business risks outweigh the valuation currently. I think that the stock price is probably leaning more towards fairly valued due to the erosion of sales as Nike slows down. I am going to wait to see a couple of quarterly reports to grasp what the true impact is. This year’s comps will look really bad due to the euphoric buying in 2021, but as long as they can stay within the management’s outlook we may see some favorable times ahead. As of right now, I am going to sit on the sideline and wait out the changes.