Can Foot Locker Ever Catch Up to Nike and Under Armour?

Foot Locker (NYSE: FL  ) will release its quarterly report on Friday, and investors have to be disappointed with the stock's relatively flat performance over the past year. Given the success that larger rivals Nike (NYSE: NKE  ) and Under Armour (NYSE: UA  ) have had with footwear and athletic apparel recently, Foot Locker's failure to participate in a big share-price rally shows that the company has work ahead to take full advantage of the opportunity in the industry.

Foot Locker is in something of a tough position. On one hand, it actually stocks merchandise made by Nike and Under Armour, meaning that it relies on the success of their products to bring customers into its stores. Yet as those two companies have taken greater steps toward establishing their own independent retail presence, Foot Locker faces the challenge of competing against some of its most important suppliers. Let's take an early look at what's been happening with Foot Locker over the past quarter and what we're likely to see in its report.

Stats on Foot Locker

Analyst EPS Estimate

$0.66

Change From Year-Ago EPS

4.8%

Revenue Estimate

$1.57 billion

Change From Year-Ago Revenue

3.2%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Will Foot Locker earnings ever take off?
Analysts have become a little less enthusiastic about Foot Locker earnings in recent months, trimming estimates for the quarter ended in October by a penny per share and cutting full-year fiscal 2014 and 2015 projections by $0.02 per share. The stock has managed to gain almost 5% since mid-August.

Foot Locker's second-quarter results showed solid though somewhat slow growth. Sales rose by 6% on a nearly 12% rise in net income, but earnings failed to match the higher growth expectations investors had for the athletic retailer. Year-to-date comparable-store sales of 3.5% look attractive compared to many retailers in other areas, but they don't produce the growth necessary to keep up with Nike and Under Armour in the long run.

Part of the reason Foot Locker has lagged behind those two companies is that it has a fairly conservative business strategy. Rather than focusing simply on boosting store counts, Foot Locker only opens new stores on a very selective basis, and lately it has spent a lot of effort on remodeling existing locations and relocating existing stores in order to make them more profitable. Closing stores also weighs on revenue growth, although in the long run it should lead to higher profits as well.

Yet the biggest question facing Foot Locker is the extent to which it can actually cash in on Nike's and Under Armour's success. Foot Locker has done a good job of rolling out various brands from its suppliers, with Nike running-shoe brands like Flyknit and Free starting to pick up steam. How well Foot Locker is able to negotiate with Under Armour and Nike to get favorable terms in its supply contracts will be the key to driving earnings growth going forward. Still, as those suppliers develop new ways to distribute their products, Foot Locker might find itself in the difficult situation of having to accept less attractive terms just to get the goods it needs to bring customers into its stores.

In the Foot Locker earnings report, watch to see how well the integration of its Runners Point Group purchase back in July has gone. With the move helping Foot Locker establish a 200-store presence in Germany, it'll be interesting to see whether a sluggish European economy holds back or enhances the chain's growth.

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