A Misstep by Foot Locker?

08/28/2017 2:54 am EST

Focus: CONSUMER

Jason Clark

Contributing Editor, The Prudent Speculator

Investors threw a penalty flag at Foot Locker (FL) on August 18th, sending the already discounted shares of the athletic footwear and apparel retailer back by more than 27% after fiscal Q2 2018 financial results came in well below consensus analyst estimates, notes Jason Clark, value investor and contributing editor to The Prudent Speculator.


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The company reported adjusted EPS of $0.62, versus consensus analyst estimates of $0.89. Revenue for the quarter of $1.7 billion was more than 5% below forecasts of $1.8 billion, while same-store comparable sales dropped 6%.

Foot Locker CEO Richard Johnson said, “We are obviously disappointed in the results for the quarter, and our team is working quickly to adjust our operations to a changed retail landscape in which we are seeing our consumers move faster than ever from one source of inspiration or influence to another."

While changing consumer preferences and growing online competition are perpetual issues, we have confidence that Foot Locker will turn things around and we think the punishment doled out by investors was more than excessive.

Management has shown an ability to adapt and change course in the past and we can’t forget that it was just a few quarters ago that FL was a market darling firing on all cylinders.

We are constructive on the announcement that the company will close 100 stores on the year and we note that FL is a major online player already via Eastbay.com and other sites.

Obviously, the last few quarters have been tough, but we continue to like that FL has shown an ability to generate broad strength across distribution channels, geographic locations, banners and product categories.

We think FL will continue to benefit from its strategic cost control and productivity plans, in addition to incremental gains from further penetration of its apparel offerings and solid growth of its digital shopping platforms.

Additionally, we like the strong balance sheet that sports almost $7 per share of net cash, giving management operational flexibility and the ability to be aggressive in buying back shares after the latest share price shellacking.

As management said on the earnings call, “We have almost our entire $1.2 billion share repurchase authorization available and we remain fully committed to returning cash to investors. With management and the board fully confident in our ability to reaccelerate the business over time, we will consider a full range of share repurchase alternatives.”

FL now sports a dividend yield of 3.6%, so while we have slashed our Target Price to $68, we continue to find the stock to be attractive.

Analysts have been busy whacking their ratings (not sure how they can like it at $60 and hate it at $34) and their earnings estimates, but most are still thinking net income will come in near $4.00 per share this year, meaning the shares trade for a single-digit P/E, even with the conservative outlook.

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