Tuesday, March 9, 1999
Just for Feet
Price (3/8/99): $12 1/16
HOW DID IT FIND TROUBLE?
Foul! More than just a hoops infraction, that seems to be the odor permeating from the stinky soles of footwear retailers recently. From price wars on the once seemingly unsinkable branded bestsellers to a general fashion statement away from sneakers and into comfortable brown shoes, the entire sector is looking like a three-pointer -- a long shot indeed.
Just for Feet (Nasdaq: FEET) was supposed to be the new team captain, taking over from sleepy giant Venator (NYSE: Z) with its interactive superstore format and hyper-expansion. In some ways Just for Feet has lived up to those expectations, delivering 20 consecutive quarters of same-store sales hikes. However, with margins contracting, earnings growth has trailed well behind the top-line burst. Sales have doubled over the past two years, but earnings have only risen by half that rate.
While that may still seem like healthy bottom-line performance, the company has been whistled for offensive charging anyway. When a sector is in trouble, few are immune from the pessimism. That is why, after closing in on $30 a share over the summer, the stock has had to call time out.
Birmingham, Alabama's Just for Feet operates or franchises 147 footwear superstores and 183 smaller specialty stores. The namesake superstores carry 2,500 to 4,500 styles of shoes. The typical athletic footwear chain carries a fifth of that. The stores feature sports-themed decor and multimedia entertainment, even an in-store basketball court.
In July, the company acquired the 39-unit Sneaker Stadium chain and is in the process of converting most of those locations into Just for Feet stores.
12-month sales: $695.7 million
12-month income: $29.9 million
12-month EPS: $0.94
Profit Margin: 4.3%
Market Cap: $383.6 million
Cash: $6.9 million
Current Assets: $384.6 million
Current Liabilities: $109.2 million
Long-term Debt: $145.7 million
HOW COULD YOU HAVE SEEN IT COMING?
Sector weakness is never to be taken lightly. On July 8, 1998, Just for Feet hit a new 52-week high. Why? Who knows. The day before, both Foot Locker parent Venator and The Sports Authority (NYSE: TSA) tumbled after pre-announcing quarterly results that were well below analyst expectations.
The laces of the athletic shoe retailers had come undone, yet Just for Feet kept on jogging. It was bound to get tripped up eventually. The Sports Authority was a close match to the chain's namesake superstores. Venator's concepts were in sync with Just for Feet's smaller mall-based stores.
So investors had plenty of time to lace up and move on before the stock took a spill. And it did take a spill.
WHERE TO FROM HERE?
The sector is not as well-conditioned as some of its clientele. Between the NBA lockout and Michael Jordan's retirement, the endorsement luster of the athletic footwear industry has been taken down a few notches. That has forced even the almighty Nike (NYSE: NKE) into discounts, and now the Air Giant is pushing the creative envelope. Over the next few months, it appears that Nike will set up exclusive lines to be carried only at select chains.
It is a move that may very well re-light the fire under the retailers' soles -- at least the ones with the financial muscle to capitalize on the marketing opportunity. In that regard, while Just for Feet does have a bit of debt on its books, it still possesses one of the best looking balance sheets in the industry. That has helped the company withstand and actually continue to expand even during these difficult times.
While earning estimates for this year have fallen from $1.40 to $1.25 per share in recent months, that is still decent growth and a bargain for a company selling at a single-digit forward earnings multiple. Next year, the expectations are for the company to earn $1.56 per share. While analysts often price a good deal of optimism and sector recovery into their estimates, there is still some upside to those projections. If net profit margins return to the 6-7% the company was reporting just two years ago, earnings of better than $2 a share would be a lay-up. And the stock at these prices? A slam-dunk.
--Rick Aristotle Munarriz
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