Step Up to Foot Locker

08/17/2015 7:00 am EST

Focus: STOCKS

As a major global retailer of athletic footwear and apparel, our latest Focus Stock idea offers athletic-inspired performance products for various activities, including basketball, running, and training, notes analyst Tuna Amobi in S&P's The Outlook.

Foot Locker (FL) operates 3,423 stores in 23 countries, including in the US, Canada, Europe, Australia, and New Zealand.

The Athletic Stores segment includes Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, and Footaction.

Foot Locker is well positioned to further benefit from newness and innovation in product offerings and the trend of more people leading an active lifestyle.

The company’s offerings are manufactured primarily by leading athletic brands such as Nike (NKE), which is the company’s largest supplier.

In fiscal 2015, about 70% of consolidated revenues were derived from the US.

Under its strategic plan, the company’s priorities include driving performance in its core business on improved customer engagement and intensifying its leading position in products for kids.

The company is also expanding aggressively in Europe, having acquired Runners Point Group, which operates 199 stores across Germany, Austria, and the Netherlands.

Foot Locker is also investing and growing its digital business and recording exceptional growth in its women’s business (anchored by its SIX:02 brand).

Accordingly, Foot Locker has targeted sales of $10 billion by FY21 (versus $7.2 billion in FY15), as well as operating margins of 12.5% (versus 11.3%). We expect total sales to advance 2.5% in FY16 and 5.1% in FY17.

In addition, we note plans to add 50 to 60 net new stores per year. In FY15, total sales increased 10%, on 8% higher comparable-store sales.

Risks to our recommendation and target price include a sharp pullback in global consumer discretionary spending and foreign currency headwinds, particularly in Europe.

Foot Locker earns S&P’s highest investment recommendation of 5-Stars or Strong Buy.

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