Footstar Dances the Double

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By Rick Aristotle Munarriz (TMF Edible)
December 18, 2000

Footstar Inc.

Phone: 201-934-2000��

Price (12/15/00): $46.81

How Did It Double?

Don't tread on me! That's the clear signal being sent by the once-trampled athletic footwear industry. With Nike (NYSE: NKE) and Reebok (NYSE: RBK) trading near their 52 week highs, one thing is clear: Sneakers have been sneaking back into investor fancy. It should come as no surprise that athletic footwear is featured in our new Industry Focus 2001

Footstar (NYSE: FTS) has been more than happy to sell a little bit of sole. The company behind the Footaction, Just for Feet, and Meldisco chains has seen revenues climb by 17% so far this year. Same-store sales are up by 2.7% and have been trending substantially higher so far in its fiscal fourth quarter.

Steady? That's what the market seems to be rewarding nowadays. For Footstar stock that has meant an uphill jog as the company has consistently beaten quarterly estimates. With a pair of earning-enhancing acquisitions announced this year -- Just for Feet back in March and the licensed footwear assets of J. Baker (Nasdaq: JBAK) just last month -- Footstar has certainly earned its out-of-this-world moniker. �

Business Description

Footstar was born in 1996 when Melville decided to spin off its Meldisco, Footaction, and Thom McAn footwear chains. Melville eventually broke off into more parts -- including CVS (NYSE: CVS).

Today Meldisco has grown to more than 2500 locations. Most of the discount footwear units are actually leased spaces inside Kmart (NYSE: KM) stores. Footaction is a mall-based athletic footwear and sports apparel retailer with 550 locations.

Earlier this year Footstar acquired the 89-unit-strong Just For Feet superstore concept. �

Financial Facts

Income Statement
12-month sales: ������$2113.4 million
12-month income: ������$62.5 million
12-month EPS: ���������$3.05
Profit Margin: ����������3%
Market Cap: ���������$950.2 million

Balance Sheet
Cash: ��������������������$13.1 million
Current Assets: ����$531.4 million
Current Liabilities: �$414.9 million
Long-term Debt �����������N/A

Price-to-earnings: 15.35
Price-to-sales: ������0.45

How Could You Have Found This Double?

Back in February the company announced a share repurchase plan. That's been the norm for Footstar, which has bought back 37% of its outstanding shares since its 1996 publicly traded debut. Was that the ultimate wake up call?

The shares were sleepy for a reason. Footstar's top-line annualized growth rate over the past three and five years ran a paltry 4% and 3%, respectively. Still, growth in of itself was a nifty achievement given the consumer's distaste for athletic footwear in favor of the stylish feel of "the brown shoe." Credit for the otherwise lackluster consistency over the years goes to Meldisco.

The discount operation leases out space. While mostly inside Kmart department stores, the company has also set up smaller shoe marts in unlikely places like the Rite Aid (NYSE: RAD) drugstore chain. By shoehorning itself into the steady flow of a bigger store's traffic, the company was able to move more than just sneakers. From Thom McAn loafers to its Cobbie Cuddlers, Meldisco was able to keep pace with the shoe industry regardless of niche specific trends. Last year, Meldisco accounted for two-thirds of Footstar's sales and a whopping 84% of operating profits.

With Meldisco being the ideal low-overhead, predictable-volume division, it was up to Footaction to serve as the catalyst for a little more octane in Footstar's growth levels. When? Other industry players provided the answer. There was a huge rebound at Reebok early in the year, which had been gradually giving up market share in an already-shrinking market. Then we had a notable sales recovery for athletic footwear giant Venator (NYSE: Z) when it reported double-digit sales growth in its fiscal first quarter. The white shoe was a white knight -- and Footstar's Footaction chain had the registers at the ready.

Where to From Here?

Footstar has made two savvy moves this year. Back in March, the Just for Feet deal gave the company a high volume big box outside-the-mall concept to go with the Footaction mall magnets. No one accused the company of buying high since the superstore format was far removed from its Wall Street darling days when the perception was that bigger was better. It was a timely purchase just as the athletic footwear market was beginning to bounce back. It was also a busy concept that would help grow the top line, at the very least.

The bottom line should get a boost with the company's asset acquisition from J. Baker. The company is already expecting J. Baker's business to be accretive to earnings over the years ahead -- an extra dime a share next year, an extra quarter a share come 2002.

The company is now projecting next year's earnings to come in between $3.60 to $3.66 a share. With a few sleepy or skeptical analysts still glued to estimates as low as $3.50, the consensus may be setting itself up for another year of upside surprises. Just last month, comps were up a big 13.9% on a 30% uptick in sales.

That was welcome momentum as the company headed into the holiday selling season. Will that mean the company -- once again -- trumps estimates calling for $3.14 in earnings per share this year? Could be. But one thing is for sure, Footstar looks poised to land on its feet.

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