Pullback is a Chance to Step Up to Foot Locker

12/04/2019 5:00 am EST

Focus: CONSUMER

Jason Clark

Contributing Editor, The Prudent Speculator

Despite turning in a solid quarter, shares of Foot Locker (FL) plummeted almost 12% after the specialty retailer gave a bit more conservative outlook than expected, observes Jason Clark, value expert and contributing editor to The Prudent Speculator.

The company also said that it would discontinue providing quarterly guidance, ugh it will offer annual projections. Of course, as long-term-oriented investors, we are more than fine with the change, even as we know that short-term focused analysts and traders were disconcerted.

Revenue for fiscal Q3 2020 came in at $1.93 billion, versus estimates of $1.94 billion, while adjusted EPS was $1.13, compared to forecasts looking for $1.07. Same store comparable sales grew 5.7% in the reported quarter.

The company’s cash totaled $744 million, while the debt on its balance sheet was $122 million, even after FL bought back 4.6 million shares for $178 million during the quarter and paid a quarterly dividend of $0.38 per share, for a total of $41 million.

We are constructive on Foot Locker’s sustained positive momentum in comparable store sales even as numerous retailers struggle with foot traffic softness in traditional malls.

We also think the recent announcement by Nike (NKE) that it would end its partnership with Amazon (AMZN) should push some near-term incremental market share FL’s way.

Of course, we understand that in the near-term, the stock could remain under pressure because of the trade hostilities with China and the concern that its main suppliers (Nike and Adidas) are putting more emphasis on trying to build direct relationships with end consumers.

At the end of the day, we like that the company has continued to reiterate its four strategic imperatives: elevating customer experience; investing in long-term growth; driving productivity; and leveraging the power of its talent pool.

We also are pleased with the continued work to become a more well-rounded omnichannel retailer. We think the growing digital channel still holds a lot of opportunity, but we realize that it doesn’t come without investment (via digital add spend), which will also keep some near-term pressure on margins.

We remain fans of the stock as FL yields 3.8%, while it trades for 8 times next 12-months adjusted EPS expectations, even as consensus analyst profit forecasts still call for growth in each of the next three years. Our target price continues to reside at $73.

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