While brick-and-mortar retailers face continued hardships thanks to the rise of e-commerce, Foot Locker (NYSE: FL ) has not only maintained significant revenue growth, but also margin expansion in the last five years. After a five-year 400% stock return, many might think it's time to sell the stock and walk away. However, there are five specific reasons that this assumption may be incorrect.
Footwear is an in-store experience
While TVs, books, and games can be bought easily online, there are certain products that consumers need an in-store experience in order to purchase with confidence. One of these is footwear. Consumers need to try, compare, and even see how certain pairs of shoes look on their feet before making the purchase.
This assumption has been reinforced with Foot Locker's 8.8% annualized revenue growth rate during the last three years, which far exceeds the 5.5% growth rate during the same period within the retail industry. Foot Locker's growth accelerated to 13.1% during its last quarter.
Foot Locker is also a direct beneficiary of a footwear company's willingness to innovate and create blockbuster brands with key sponsorships. In the last year, this has weighed especially in Foot Locker's favor.
Nike remains a key piece of its pie, and is thriving
Luckily for Foot Locker, it benefits from Nike (NYSE: NKE ) , a company that's thriving in footwear. According to SportsOneSource, the Nike and Jordan footwear brands, both owned by the former, accounted for $62.63 of every $100 that consumers spent on footwear in North America during the first quarter. In other words, Nike's success is a good reflection of the performance of Foot Locker.
Furthermore, in Foot Locker's first-quarter 10-Q filing, the company noted that basketball continued to be one of the biggest drivers of sales increases, with basketball footwear and apparel driven by Jordan and other key marquee player styles.
In Nike's last quarter, $4.4 billion of its $7.4 billion in total revenue came from footwear, which was the company's strongest performing segment, with growth of 14% year over year. Nike's future orders growth of 11% implies ongoing success and, with $20.6 billion of Nike's $27.8 billion of annual revenue coming from wholesale, from retailers like Foot Locker, there's reason to believe that Foot Locker will perform well as long as Nike continues to carry it.
Under Armour making a big push in shoes
Nike is a big piece of Foot Locker's fundamental pie, but it's not the only successful brand. Under Armour (NYSE: UA ) is quickly becoming a relevant name in footwear.
During its last quarter, footwear revenue soared 34%, to $110 million, as the company focuses on training and running footwear. Notably, Foot Locker has noted in several of its 10-Q filings that gains in running shoes have driven overall sales higher, specifically in Europe.
While nearly one-third of Under Armour's revenue comes from direct-to-consumers, it's still a brand that is highly visible in all Foot Locker stores, which bodes well for the retailer, especially as the company makes strides to enter new markets like basketball.
The resurgence of Skechers
Everyone knows that Nike and Under Armour are thriving businesses, but Skechers (NYSE: SKX ) is a company that's making a huge comeback. Specifically, during the first quarter of 2014, its share of U.S. dollars in the footwear business rose from $2.48 to $3.02 of every $100 spent year over year, according to SportsOneSource.
During that first quarter, revenue increased 21%, but then, in the second quarter, revenue accelerated to growth of 37% year over year, giving the company growth of 28.8% during the first six months of 2014. Furthermore, Skechers owns more than 50% of the walking shoe category, according to the company, and its growth is being catapulted due to renewed consumer interest in its GORun shoe line, a segment of footwear that has performed well in Foot Locker stores. Also, its Women's sport footwear presence has grown, with the company holding the No. 2 position according to SportsScanInfo as of June.
With $587.1 million in second-quarter revenue, mainly from footwear, Skechers has a much larger presence in footwear than Under Armour. Hence, its resurgence is great for retailers like Foot Locker.
Foot Locker has flown under the radar
With all things considered, Foot Locker is benefiting from what appears to be one of the strongest industries in retail. Yet, despite a 400% stock gain during the last five years, the company trades at less than 15 times next year's expected earnings.
Foot Locker's earnings growth has soared in the last five years due to revenue and margin expansion, making it much cheaper than Nike at 20 times forward earnings with very similar growth. Hence, it's a value play, too.
Foot Locker serves as a diversified holding that tracks the performance of all major footwear retailers. While Nike is its biggest brand, the faster-growing Under Armour and Skechers are both growing in size and exposure within Foot Locker stores. Therefore, in a market that's celebrating one of the best bull eras in history, investors can find rare value and growth in shares of Foot Locker.
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