Updates on Investor AB and Foot Locker

Investor AB Annual Report (link)

The Chairman Jacob Wallenberg:
The importance of having the right person at the right place at the right time cannot be overestimated. As my grandfather said: “No company is so bad that it cannot be turned around by a good leader”.
In Atlas Copco, we fully support the proposal made early 2017 to split the group into
two focused, market-leading new companies, further enhancing future value creation.
Net asset value growth and cash flow was strong. For 2016, the board proposes to increase the dividend to SEK 11 per share (10).

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Foot Locker 1Q16 Earnings

You can find the Foot Locker first quarter results (here)

From the report, as they highlighted:

  • Net Income of $191 Million, an All-Time High for the Company
  • 25th Consecutive Quarter of Sales and Profit Increases
  • Earnings Per Share of $1.39, an 8 Percent Increase
  • Comparable-Store Sales Increase of 2.9 Percent
Richard Johnson, Chairman of the Board and CEO said:
We produced the most profitable quarter in the Company’s long history, an accomplishment of which everyone at Foot Locker, Inc. should be very proud

Sounds not so bad you think, still the stock is losing around 6% today. The key word here is “rose less than analysts were expecting“. It seems it’s the same with Ross Store (ROST), they are also down today although profit for the quarter was better than projected.

As Peter Schacknow on CNBC.com writes:

The athletic footwear and apparel retailer matched estimates with first-quarter profit of $1.39 per share. Revenue was slightly below analysts’ expectations, and the comparable-store sales increase of 2.9 percent was below consensus estimates of a 4.5 percent jump.

I don’t see this as a tragedy. How can they match estimates, almost match revenue and miss so much on CSS anyway? Foot Locker is defiantly one of the stronger retailers.

To give you a perspective how bad some other names in retail industry performed:

I think the best thing an Investor can do about this is looking at the business and ignore Mr. Market. If the business do well the stock will follow.

Foot Locker now trades at a Forward PE of 12,3 (gurufocus) and a dividend yield of 1,75%.

 

More on Foot Locker, turnover and some links

I took a further look at the Foot Locker Investor relations homepage (which by the way looks nice and simple) and found their March 2015 Investor Day Presentation (here). Very interesting numbers on page 77: They plan to have $ 10 bn in Sales and a net income margin of 8,5% in 2020. In my model I calculated with $ 9.8 bn and 8,96%. I’m very happy that the numbers are so close together which reinforced my opinion on the company. I would say their forecast is reasonable.

 

Turnover at Foot Locker

Numbers according to yahoo finance:

Inventory, Jan 2016 Revenue, Jan 2016 Turnover
FL 1285000 7412000 5,8
ROST 1419104 11939999 8,4
TJX 3695113 30944938 8,4
KSS 4038000 19204000 4,8
WMT 44469000 482130000 10,8
numbers in thousands

numbers according to yahoo finance

Turnover easy explained: Let’s assume you have the backyard full of stuff. The stuff is worth 100 USD. That’s 100 USD in inventory. Let’s say you sell all that stuff in one year, that would be 100 USD in reveue. Now lets assume you would buy new stuff (worth 100 USD) and sell that again – and repeat that till you sold stuff 5x in a year. That would be a 5x turnover per year.

There is clearly room for a higher turnover rate at Foot Locker. We will see if they can improve their rate till 2020 as they plan (+ 3x per year).

On the other hand Turnover is not everything. Buying your stuff worth 100 USD and selling it for 100USD wouldn’t make it a great deal, even if you sell your stuff 20 times in a year. Wal-Mart for example has a much higher turnover rate than Foot Locker but their margin is lower.

Revenue, Jan 2016 Net Income, Jan 2016 Net margin
FL 7412000 541000 7,3%
ROST 11939999 1020661 8,5%
TJX 30944938 2277658 7,4%
KSS 19204000 673000 3,5%
WMT 482130000 14694000 3,0%
numbers in thousands

By the way, I am impressed by ROST’s numbers.

Some links:

Hurricane Capital via oldschoolvalue.com with an fantastic piece on how to spot superior operators in the Retail Industry (link)

Hennes & Mauritz grew sales 9% in Q1-2016 but profits were lower (link)

The long-term-investments blog with a overview about traditional Apparel Retailing from a dividend perspective (link)

Foot Locker, Inc: buy

I have already looked at Foot Locker Inc here and now have researched the shoe retailer further. And I mostly liked what I saw. This are my additional notes as pros and cons:

Cons:

Of course not everything is clear in the future: I am a bit concerned that their profitability will go down in a “reverse to the mean” manner – maybe their success will attract competitors and copycats. On the other handit seems like they have some fanbase (link, german)

Eddy Elfenbein today wrote this:

One area of concern for the economy and the market is consumer spending. This week, several retail stocks fell sharply after Macy’s and Nordstrom reported disappointing sales … The online retailing giant seems to gobble up everything in its path. This week, Amazon broke $700 per share.

I see eCommerce as threat to them but people mostly buying shoes in stores because they want them to fit. At least that’s the case with me (and I am buying online lot). Nevertheless this is clearly something to have an eye on in the future.

Pros:

They have a strong Cash Flow, low debt and net cash. And they have grown nicely (Sales & Sales per Gross Square Foot ) in the past few years. The management have definitely done a lot of things right in the past.

I looked at their 2011 annual report (wich includes the numbers from 2007 till 2011) and they got quite passable through the financial crisis. Revenues were down but I think that’s O.K. – they recovered quickly.

As seen on Insider Monkey:

…Foot Locker also received a boost of confidence from the hedge fund community as a whole, as 35 of the funds followed by Insider Monkey held a position in the company at the end of 2015, up from 25 registered a quarter earlier. Foot Locker, Inc. (NYSE:FL) has a market cap of $8.62 billion and pays an annual dividend of $1.02 per share, the equivalent of a 1.78% dividend yield….

…Billionaire Ken Griffin is also bullish on Foot Locker, Inc. (NYSE:FL), with his fund Citadel Investment Group having reported a massive increase in its Foot Locker holding over the fourth quarter, to 2.75 million shares.

 

Some more fun with numbers:

I looked at their debt situation to define a discount rate: Morningstar Debt/Bonds overview FL

They have a year 2022 – 8.5% bond outstanding which is currently trading at 4.93% yield to maturity. I assumed a 6.5% discount rate for the equity.

I calculated with the assumed sell price for the year 2020 which I see at 107,85$ (of course things could turn out quite different). I discounted this price with a rate of 6,5% and came up with a “net present value” of about 82$. (note: this calculation does not include or consider dividends).

Discount Rate
6,5%
2020 107,85
2019 100,83
2018 94,28
2017 88,15
2016 82,42
NPV 82,42
Current price 63,2
Upside 30%

Bottom line:

Considering the stock is now somewhere around 60 US$, this produces a 30% upside. So I bought a small amount.

The buy in Portfolio context:

As the market has rallied (or at least not crashed) for about 7 years and I defiantly want to have enough cash arround. So I bought just a small position for my portfolio. I am willing to add to the Position if the price will decline while the business-outlook stays the same. This Investment case needs at least some modest growth to turn out well.

 

Disclaimer

The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!