Foot Locker reported results for Q1/19 (Year-end Jan 2019), which were better than expected and the shares rallied over 20% on the day closing at $55.74 which is above our $50 price target.
Management managed to beat both sales and earnings estimates after managing to reduce the group’s inventory levels. The drop in comparable-store sales also declined less than the market expected.
The good about Foot Locker
• Footwear trends are improving. I am confident that new product lines will be announced in the coming months which will drive sales higher
• The company is going to start focusing on increasing online sales. (Although this is a positive for the top line, it is still unknown how it will influence margins)
• The company does not have a large inventory base like its competitors (mainly Dick’s Sporting goods)
• We believe Foot Locker is well-positioned to benefit from innovation and growth coming from new products from its vendor base including Adidas, Nike, and Puma
• Foot Locker’s premium product positioning should mitigate competitive pressures
• We acknowledge disruption/challenges in the moderate/value distribution channels but believe that vendor efforts to clean up and reduce distribution will only strengthen Foot Locker’s more premium focused business
• We believe the company has room to reduce expenses as rent concessions could serve as an additional lever to combat a deceleration in sales trends
Valuation
However, at this stage we feel reluctant to raise the price target further than $50 per share due to the fact that the company still has hurdles it needs to overcome before we can justify an improvement in our price target.
We also believe that the current P/E of 13x is already pricing in future improvements and surprises, which may come out in FY2019.
The market is expecting an earnings per share figure of $4.51 and $4.87 for financial year 2019 and 2020 respectively. Using a forward P/E multiple of 11x, this would translate into a price target of $53.57 which is below the current price.
We suggest selling out of the shares at these levels.
About Foot Locker
Foot Locker Retail, Inc. is an American sportswear and footwear retailer, with its headquarters in Midtown Manhattan, New York City, and operating in 28 countries worldwide.
The company operates the eponymous Foot Locker chain of athletic footwear retail outlets (along with Kids Foot Locker and Lady Foot Locker stores), and other athletic-based divisions including Champs Sports, Footaction USA, House of Hoops, and Eastbay/Footlocker.com, which owns the rights to Final Score. The company is also famous for its employees' uniforms at its flagship Foot Locker chain, resembling those of referees.
Disclaimer:
This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.