Shares of Foot Locker (FL) fell following the quarterly financial release by key supplier Nike (NKE), notes Jason Clark, a value investing expert and contributing editor to The Prudent Speculator.
While Nike reported a strong quarter, the athletic footwear powerhouse said that the coming quarter and overall fiscal year would be behind pace as supply chain issues continued to mount.
This is near-term problematic for Foot Locker, as Nike products have been 70% or more of their inventory during the last few years. The lag in incoming product will force the company to miss out on potential sales as demand for athletic gear and footwear has remained hot.
Shutdowns in Vietnam due to a Covid resurgence are hitting athleticwear makers hard as they’re unable to supply enough shoes to consumers across the world. Nike had shifted approximately half of its shoe production over the past handful of years from China to Vietnam.
Nike CFO Matthew Friend outlined the issues during the company’s call with analysts. “Most Nike factories in Vietnam remain shut due to government mandates and the company has lost about 10 weeks of production since mid-July, he said. Nike doesn’t expect the facilities to reopen until October, and they’ll take several months to ramp up manufacturing.”
While shares of Foot Locker will continue to face near-term supply chain headwinds, we note that they are more than 20% off their mid-July high and we see this as a good entry point to add to or initiate a new position in a broadly diversified portfolio as we don’t see demand for their product offerings waning anytime soon.
We continue to believe the company has several competitive edges, including broad distribution channels, geographic locations, and multiple banners and product categories. We also think that longer term FL will benefit from its strategic cost control and productivity plans, in addition to further penetration of its apparel offerings and solid growth of its digital shopping platforms, including eastbay.com.
There will continue to be evolution as the company is seeing the value of bolstering its digital presence, and it may have to consider “off-mall” concepts in the future as there is the chance that some malls in the U.S. might not survive or may no longer be optimal in some geographic locations.
FL shares trade at less than 8 times the next 12 month consensus EPS projections, and offer a current dividend yield of 2.5%, while the balance sheet is in terrific shape. Our Target Price for FL have been trimmed a bit to $80.
