As I’ve talked about in earlier articles, the “athleisure” / athletic attire market is poised for progress on account of sure circumstances introduced upon by the pandemic. I wished to search for extra names that would capitalize on this development. Foot Locker (FL) appeared initially attention-grabbing to me. Nevertheless, after doing a little due diligence, I do not suppose the corporate is fitted to a long-term maintain.
Only a transient background on the corporate, Foot Locker is a worldwide retailer of sneakers and different athletic footwear. The corporate operates 3,129 shops, nearly all of that are mall-based. The corporate’s major model is its namesake Foot Locker. It has different manufacturers as effectively akin to Champs Sports activities, Footaction, Runners level and Sidestep amongst others. So far as I can inform, there’s little to distinguish these manufacturers from each other as all of them goal the identical market. Whereas the corporate is current in 27 international locations, it obtains the overwhelming majority of its revenues from the US (71% of 2019 income).
Aside from bodily shops, Foot Locker additionally has omnichannel capabilities so as to service its clients. The corporate operates a wide range of web sites, akin to footlocker.com, and gives providers akin to order on-line and pick-up in retailer.
When it comes to Q2 2020 outcomes (ended August 2020), gross sales elevated to $2.zero billion in comparison with $1.77 billion on the identical time final 12 months. This displays pent-up demand coming from the March-Might coronavirus associated lockdowns. There have been indicators of individuals going out for runs/walks or extra so as to take care of the coronavirus pandemic. These traits have benefited retailers like Foot Locker.
Customers have more cash of their pockets because of authorities stimulus checks – and apparently many are utilizing it at malls and on-line to purchase new sneakers, which is sweet information for Foot Locker.
Foot Locker is booming as individuals spend their stimulus on sneakers
I consider the 17% enhance in gross sales for the quarter is reflective of this development. Nevertheless, YTD income, we see that we’re nonetheless down for the 12 months as 2020 YTD income is $3.25 billion in comparison with $3.85 billion on the identical time final 12 months, a lower of 15.6%. Web earnings for the second quarter was $45 million in comparison with $60 million from a 12 months prior. Nevertheless, web earnings outcomes have been dragged down by a collection of one-time prices akin to 1) $19 million cost for restructuring and discontinued operations, 2) $18 million from damages as a result of current riots and three) $1 million from pension prices. Excluding these things, web earnings would have been $83 million which is 38% greater than the identical time final 12 months.
The corporate is in a rock-solid monetary place with money of $1.37 billion in opposition to whole debt of $121 million. In the course of the preliminary phases of the pandemic, there was nonetheless a number of uncertainty on the affect on retail shops. This was very true in the course of the peak of the lockdown when all non-essential shops have been mandated to be closed by authorities businesses. Now that issues have calmed down a bit, we are able to see that retail shops that target athletic put on like Foot Locker, are doing effective revenue-wise. The corporate took the prudent step of freezing the dividend to avoid wasting money however as of Q2 2020 has since reinstated it. Trying on the firm’s money place and gross sales for this quarter, I consider that this was the precise transfer and isn’t overly aggressive.
The long-term affect of COVID-19
The retail athletic footwear enterprise is extremely aggressive. Foot Locker at the moment competes with different footwear specialty shops, shops, and even the shoe producers themselves. The corporate’s fundamental aggressive benefit is the size of its retail operations in addition to its relationship with key suppliers specifically producers akin to Nike (NKE). The corporate has near 3221 shops worldwide making it an necessary distributor within the athletic footwear market. Whereas the corporate carries a number of manufacturers really, 91% of the corporate’s merchandise offered comes from solely 5 key suppliers.
Actually, Nike is the largest provider to the corporate at 71% of all merchandise offered. The corporate nearly has a symbiotic relationship with Nike as Foot Locker works with Nike to make sure it correctly communicates Nike’s model message within the retailer. Foot Locker obtains from Nike a sure variety of particular launch gadgets as effectively and the 2 corporations work collectively to make sure constant pricing between Nike’s personal shops and Foot Locker. This relationship labored out effectively up to now regardless of Nike’s personal retail shops because it did not make sense for Nike to develop its retail footprint to compete with Foot Locker. There may be a number of logistical / challenges to sustaining a big retail footprint that it is sensible for them to work collectively.
Nike’s app powers Foot Locker’s new NYC retailer
Nevertheless, this will likely now not be the case on the subject of on-line buying as this platform has limitless scalability. In different phrases, Nike can simply scale its e-commerce operations to deal with an growing variety of clients. The coronavirus pandemic has accelerated shoppers’ shift to digital platforms with Nike reporting a 75% enhance in e-commerce gross sales throughout its newest quarter. Controlling the digital platform has a mess of benefits for corporations like Nike akin to shopper knowledge gathering, direct interplay with the shoppers, and controlling the shopper relationship. Whereas Foot Locker is not any slouch with regard to its digital functionality, it’s nonetheless largely depending on its retail shops. In Q2 2020, digital gross sales made up roughly 30% of whole gross sales.
A key long-term danger for Foot Locker is that if e-commerce both dominates Nike’s gross sales or if Nike is ready to funnel clients into its personal retail shops by its digital platform (by way of promotions, contests and provides away). Now Foot Locker is constant to make itself related by way of its personal efforts akin to making a hub for native “sneaker tradition”. The corporate is even collaborating with Nike on an app for a digitally linked retailer. Nevertheless, Foot Locker’s working margins of 10.7% (which is near Nike’s working margins of 12%), if I have been Nike, I might be pondering of how to begin chopping this intermediary out. Nike has tried to take action up to now but it was tough to construct out an enormous brick-and-mortar community to compete. Now with e-commerce, issues may very well be completely different.
Creator’s calculation utilizing knowledge from In search of Alpha
I consider this thesis to play out over the approaching years within the medium to long run, disqualifying Foot Locker from a purchase and maintain from my perspective. Over the brief time period, the inventory may nonetheless rally because the shares are buying and selling at an honest valuation. The corporate has a stable steadiness sheet and good working margins. Utilizing ahead P/E the corporate is buying and selling at 18.7x earnings. Utilizing the long-term 5-year common EPS of $4.03, the corporate is buying and selling at 7.9x earnings. In comparison with Nike which is at a ahead P/E ratio of 43.5x and 5-year common P/E of 63.6x, this may very well be a less expensive approach to achieve publicity to Nike not less than within the brief time period. I’ve a impartial ranking on Foot Locker.
Disclosure: I/we now have no positions in any shares talked about, and no plans to provoke any positions inside the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from In search of Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.
Extra disclosure: Caveat emptor! (Purchaser beware.) Please do your personal correct due diligence on any inventory immediately or not directly talked about on this article. You in all probability ought to search recommendation from a dealer or monetary adviser earlier than making any funding choices. I do not know you or your particular circumstances, subsequently, your tolerance and suitability to take danger could differ. This text needs to be thought-about basic data, and never relied on as a proper funding advice.
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