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!