Foot Locker or Finish Line: Which Should You Run With?

by Peter Cohan | November 28, 2011 12:18 pm

Hot on the heels of Black Friday’s robust sales reports[1], footwear retailers Foot Locker (NYSE:FL[2]) and Finish Line (NASDAQ:FINL[3]) were greeted Monday morning with analyst upgrades. And their shares are up a whopping 10% and 6%, respectively, in midday trade after  UBS upgraded Foot Locker to buy[4], while Zacks upgraded Finish Line to outperform[5].

These moves are exciting for investors who bought the shares last week, but beware because the footwear retailing industry, while big, is shrinking. According to IBISWorld[6], 2011 revenues will total $20 billion, but that would be 5% below its 2010 level. Underlying that decline is a slow economy. And industry profitability is capped by the sheer variety of rivals — including mass merchandisers, discount stores and nontraditional retailers that are selling products that are mostly commodities.

IBISWorld estimates[7] that Foot Locker is the industry leader with 18.7% market share, while Finish Line is much smaller: It has 660 stores — a mere 19% of Foot Locker’s 3,426.

Foot Locker’s recent financial performance has been good. It earned 43 cents a share[8] — four cents above expectations — when it reported third-quarter 2011 results on Nov. 17. Thanks to sales of running shoes, Foot Locker was able to report its seventh consecutive quarter of results that  beat. Sales of $1.39 billion grew 9% — a big improvement in a declining industry.

But Finish Line also reported better-than-expected earnings on even faster sales growth.  Its second-quarter 2012 earnings of 39 cents per share[9] were a penny ahead of the Zacks consensus estimate. And Finish Line’s sales were up 10.1% to $331.5 million due to high back-to-school demand, bigger transactions and online sales that climbed 61%.

So here’s what the investment choice between Foot Locker and Finish Line boils down to:

Foot Locker wins this investment foot race, thanks to a more reasonable valuation. But given its wider margins, I would consider Finish Line if it can speed up its earnings growth.

Peter Cohan has no financial interest in the securities mentioned.

Endnotes:
  1. Black Friday’s robust sales reports: http://investorplace.com/2011/11/black-friday-retail-stocks-shld-aapl-bby-amzn/
  2. FL: http://studio-5.financialcontent.com/investplace/quote?Symbol=FL
  3. FINL: http://studio-5.financialcontent.com/investplace/quote?Symbol=FINL
  4. UBS upgraded Foot Locker to buy: http://localizedusa.com/2011/11/28/foot-locker-fl-shares-upgraded-to-a-buy-rating-by-ubs-ag-ubs-analysts/
  5. Zacks upgraded Finish Line to outperform: http://localizedusa.com/2011/11/24/finish-line-finl-shares-upgraded-to-a-outperform-rating-by-zacks-investment-research-analysts/
  6. IBISWorld: http://www.ibisworld.com/industry/default.aspx?indid=1073
  7. IBISWorld estimates: http://clients.ibisworld.com.ezproxy.babson.edu/industryus/Majorcompanies.aspx?indid=1073
  8. 43 cents a share: http://www.reuters.com/article/2011/11/17/footlocker-idUSL3E7MH1X420111117
  9. earnings of 39 cents per share: http://www.zacks.com/stock/news/61788/Finish+Line+Beats+Marginally
  10. $2 in fiscal year 2013: http://investing.money.msn.com/investments/earnings-estimates?symbol=FL
  11. $1.71 in fiscal 2013: http://investing.money.msn.com/investments/earnings-estimates?symbol=finl

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