Foot Locker: Racing Ahead

10/07/2014 8:00 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

Despite strong results in footwear in recent quarters, apparel is struggling, especially in Europe; however, this retailer has a track record for delivering growth and its near-term outlook is bright, suggests Richard Moroney, editor of Dow Theory Forecasts.

Foot Locker (FL) adheres to a conservative expansion strategy, with its total store count actually shrinking 3% over the past five years.

Management prefers investing in existing assets by remodeling stores and improving merchandise allocation. Foot Locker is capturing larger market share via both its physical stores and e-commerce.

Same-store sales have risen in 18 straight quarters, exceeding 5% in 14 of those periods. Operating profit margins have expanded in each of the past 19 quarters, while return on assets stands at its highest level in-at least-eight years.

For the 12 months ended July, Foot Locker's revenue climbed 9%, cash from operations 32%, and free cash flow 71%. Same-store sales surged 7.3% in the first half of fiscal 2015 ending January.

Last month, management largely reiterated guidance issued in March that calls for same-store sales to rise by the mid-single-digits in the second half of 2014. The company expects double-digit growth in per-share profits as margins continue to expand.

The consensus projects 16% higher per-share profits for the October quarter and 11% growth for the January quarter. Analyst estimates have trended higher in the past month. Foot Locker has topped consensus profit targets in four consecutive quarters and 16 of the past 18.

The shares have tallied a 39% total return in 2014, while the S&P 1500 consumer discretionary sector has barely budged, its average stock's performance dead last among the ten sectors.

Yet Foot Locker still looks cheap at 18 times trailing earnings, a 16% discount to its five-year average and 5% below its sector median. Four of six Quadrix category scores exceed 90, contributing to an Overall rank of 98 (out of 100).  Foot Locker is a Long-Term Buy.

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