Foot Locker Is a Step Ahead

Smart retailing and beautiful fundamentals make this one of retail's better picks.

Mar 11, 2014 at 1:30PM

Sports-apparel retailer Foot Locker (NYSE:FL) is one of the few retailers off to a great start in 2014. Even though bad weather took its toll on business, the company continues to run based on higher footwear sales and a highly beneficial relationship with Nike. For investors, the six-month, 40%-plus run-up in stock price may be a little intimidating, but Foot Locker remains attractively valued when compared to peers. Industry tailwinds and a great store-within-store expansion strategy could keep this retailer running faster than the rest. Here's what you need to know.

From downtown
Foot Locker is trading at and around its all-time highs as the company posted higher-than-expected sales of $1.8 billion and earnings of $0.81 per share -- up from $0.64 per share in the year-ago quarter. Driving the results are the predictably strong basketball footwear segment, where partnerships with the aforementioned Nike give shoppers access to new sneakers that can easily fetch $200 or more. Many of the shoes are not widely available at corporate competitors' stores due to a great relationship between Foot Locker and the sporting-goods behemoth.

Also boosting the company is its international segment, recently providing for double-digit same-store sales gains in Asia-Pacific, and European and Canadian comps up in the mid single digits. The company has roughly a quarter of its 3,500 stores in locations outside the United States. This leaves plenty of room for expansion and much-loved store-level sales growth.

Beyond Foot Locker's fourth-quarter earnings, there are a few great reasons to look closely at the stock despite its strong run.

Foot Locker has a beautiful balance sheet that allows for very comfortable capital deployment to areas such as store remodeling, and possibly greater efforts in returning shareholder value via buybacks and dividends. The company has $867 million in cash and short-terms, with a meager $139 million in long-term debt. Management recently announced a dividend hike (now $0.22 per share quarterly), but investors could easily see more increases in the near term as the company decides the best way to manage its cash hoard.

Foot Locker is certainly building out its store base, but not at a tremendous pace. In 2013, the company opened 85 new stores (and renovated or relocated more than 300), while closing 140. The strong same-store sales figures are not giving management the tempting green light of brisk global store expansion.

Complementing the great operating results and impeccable balance sheet is a great valuation. Even with its gains, Foot Locker trades at 13 times forward earnings and holds an EV/EBITDA of 7.8 times. The smaller but similarly performing Finish Line trades at 14.6 times earnings and has an EV/EBITDA of 8.25 times. Finish Line does not have the bonus of a rock-solid relationship with Nike, though it too has a beautiful balance sheet to assuage investors' nerves.

Investors may not see another six-month, 40% run in Foot Locker stock, but the long term remains appealing. The company continues to focus its store experience on aligning with the industry's best brands. The footwear segment has great tailwinds despite a troubling overall retail environment. International and e-commerce growth should keep comps positive here and abroad, and solid underlying fundamentals give Foot Locker the flexibility to endure continued macroeconomic strains.

For investors interested in retail, this is a great place to browse. 

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Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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