Is Foot Locker Stock a Buy?

Foot Locker (FL 0.46%) stock has fallen roughly 35% year to date as the COVID-19 pandemic forced brick-and-mortar businesses to close their stores. Over the past month, the footwear and athletic apparel retailer pulled its full-year guidance, tapped its revolving credit facility, and furloughed a large portion of its employees.

Those moves weren't surprising, but Foot Locker stock now pays a forward yield of 6.5% following the sell-off. Will that high yield set a floor under the stock, or will its decline continue through the rest of 2020?

Image source: Getty Images.

Foot Locker faced problems before the pandemic

Foot Locker already faced two major challenges before the pandemic started: sluggish mall traffic and competition from the direct-to-consumer (DTC) channels of top footwear brands such as Nike and Adidas. The escalating trade war with China, higher tariffs, and currency headwinds exacerbated the pain.

Despite those challenges, Foot Locker's business stabilized last year as it expanded its own DTC efforts, secured new styles from popular brands, and offset its weaker banners (including Kids Foot Locker and Eastbay) with the strength of its namesake stores and Champs Sports.

However, Foot Locker's comparable-store sales declined again in the fiscal fourth quarter (ended Feb. 1) as its gross margin declined both annually and sequentially.

Data source: Foot Locker quarterly reports.

Foot Locker attributed its fourth-quarter comps decline, which missed its own guidance for flat growth, to weak apparel sales, a shorter holiday shopping season, and a "highly promotional" market. Sales dipped at its brick-and-mortar stores and DTC channels, and weak sales in the U.S. offset its growth in Asia and other overseas markets.

How will the pandemic hurt Foot Locker?

Back in late February, Foot Locker expected to generate low single-digit comps growth with low- to mid-single-digit earnings per share growth for fiscal 2020.

But in mid-March, it temporarily closed most of its stores in North America, the EMEA (Europe, Middle East, and Africa) region, and Malaysia, while its stores across the rest of the Asia-Pacific region -- including Hong Kong, Singapore, Australia, and New Zealand -- stayed open. It also pulled its full-year guidance.

Image source: Getty Images.

In late March, Foot Locker drew $330 million from its $400 million revolving credit facility to boost its liquidity. Foot Locker reportd $907 million in cash and equivalents with $122 million in debt as of Feb. 1, so it should stay comfortably solvent throughout the crisis.

And most recently, Foot Locker furloughed most of its store employees in the U.S. and Canada, its supply chain employees in the U.S., and certain store employees in Australia. Therefore, the international business, which generated 29% of total revenue last year, should recover at a faster clip than the domestic business.

Foot Locker plans to provide additional information during its first-quarter report in late May, but its comps and margins will likely decline again as the weakness of its North American business offsets the growth of its Asia-Pacific stores. However, a weak U.S. dollar and low fuel costs -- which would reduce the freight costs at its DTC business -- could cushion some of that blow.

How about its valuation and dividend?

Wall Street expects Foot Locker's revenue and earnings to decline 16% and 30%, respectively, this year, before rebounding next year. Given the uncertainty that remains for 2020 and beyond, we should take those forecasts with a grain of salt, but Foot Locker stock looks dirt cheap at 8 times forward earnings estimates and just a fraction of its sales.

Foot Locker pays an annualized dividend of $1.60 per share, which represents just half of expected 2020 earnings and suggests the company can sustain its dividend for the time being. Foot Locker has raised its payout for nine straight years.

An undervalued dividend stock ... if it can bounce back

I was clearly wrong when I called Foot Locker an undervalued dividend stock last May, but it could finally be bottoming out. Foot Locker is still operating many of its overseas stores, its balance sheet remains stable, and the stock looks ridiculously cheap with a generous 6.5% yield as of this writing.

However, I'm reluctant to buy shares before the company provides clear guidance regarding the pandemic in its fiscal first quarter report. It's certainly in better shape than other struggling retailers, but it still faces the long-term threats of dying malls and DTC competition from its top-selling brands. I'm not ready to pull the trigger on Foot Locker, especially when so many other high-quality dividend stocks are on sale.