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Is Foot Locker the Right Choice for Your Portfolio?

Footwear retailers have flushed the market with vibrant colors and new materials that have grabbed customers' attention. New technology in the athletic shoe space from players such as Nike (NYSE: NKE  ) has been quite successful, as Flyknit shoes and Nike Free have lured customers to make purchases. These products also benefit retailers that sell the shoes supplied by Nike and other footwear companies.

Specialty athletic retailer Foot Locker (NYSE: FL  )  has seen this demand for new products. Its recent-quarter results also came in ahead of expectations, which caused its stock price to surge.

Into the numbers
Foot Locker's revenue came in at $1.62 billion, a 6.4% jump over last year's quarter. This was above the estimate for $1.59 billion, driven by the retailer's move to increase its average selling price, which offset the impact of slightly lower customer traffic. Moreover, Foot Locker opened 28 new stores during the quarter, which added to the top line. Existing stores also added to this growth, evidenced by comparable-store sales growth of 4.1%.

Moving down to the bottom line, the retailer's adjusted earnings increased by $0.05 to $0.68 per share for the quarter. However, increased costs led to a flat gross margin as compared to last year.

Peer comparison
Foot Locker has performed better than its peer Finish Line (NASDAQ: FINL  ) . Although both companies have recorded great stock-price growth, Foot Locker did outperform Finish Line, as shown in the chart below:

FL Chart

FL data by YCharts

Over the last five years, Foot Locker's return of 473.3% has been pretty impressive. Increased customer traffic has led revenue higher and the company's cost containment measures have moved its earnings north.

Finish Line has also been witnessing annual revenue growth. However, it could not improve its bottom line as rapidly as Foot Locker did, as explained by Daniel Jones. This might be why Finish Line's stock price appreciated less during the same time period. However, Finish Line has attempted to cope through efforts such as its store deal with Macy's and by enhancing its online operations.

Surviving the competition
Although Foot Locker has been faring well against its peer Finish Line, other retailers could deter its growth. Nike, which supplies Foot Locker, is planning to expand its retail presence. This move could prove challenging for Foot Locker, as the retailer would have to compete with its supplier.

Nonetheless, Foot Locker has made significant strategic moves recently which could help it deal with this challenge. It recently acquired European athletic retailer Runners Point Group, which will help it expand its presence in the region. Foot Locker will gain Runners Point Group's 200 stores and its online unit through this acquisition, strengthening its presence in Europe. Moreover, Runners Point Group has helped the footwear retailer's European sales grow by 25%, further boosting its top line.

Additionally, Nike and Reebok have introduced new products for the holiday season, which will attract more customers. New offerings such as BOOST and Roshe Run, from Adidas and Nike respectively, have been doing well.

Final thoughts
Foot Locker has been performing well because of new product offerings and a recent acquisition. It has been expanding its presence by opening new stores, enhancing its online operations, and adding new businesses. Moreover, its focus on the womens' segment and its store remodeling program could provide more benefits. Hence, this could be a great pick for your portfolio.

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Related Tickers

9/26/2016 4:00 PM
FINL $22.61 Down -0.14 -0.62%
The Finish Line CAPS Rating: **
FL $67.58 Up +0.51 +0.76%
Foot Locker CAPS Rating: ***
NKE $54.40 Down -0.75 -1.36%
Nike CAPS Rating: *****