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.
Consumer Discretionary[12], Retail[13], Restaurant[14]
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