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: growing strongly, narrow margins; cheap stock. Foot Locker sales have risen 4% in the past 12 months to $5.5 million, while its net income spiked 260% to $254 million — yielding a low net margin of 4.6%. Its price-earnings to growth ratio (where a PEG of 1.0 is considered fairly priced) of 0.97 is cheap on a P/E of 13.1 and expected earnings growth of 13.5% to $2 in fiscal year 2013[10].
• Finish Line: growing, decent margins; expensive stock. Finish Line sales have increased 4.8% in the past 12 months to $1.3 billion, while net income has increased 35.5% to $74 million — yielding a slightly wider 5.9% net profit margin. Its PEG of 1.62 is expensive on a P/E of 14.7 and expected earnings growth of 9.1% to $1.71 in fiscal 2013[11].

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.

Source URL: https://investorplace.com/2011/11/foot-locker-or-finish-line-which-should-you-run-with/

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