The all-time highs in Foot Locker, Inc. (NYSE:FL) seem like years ago at this point. FL stock is down about 6% on Wednesday, marking a roughly 40% decline in just a few weeks, kicking it far off its perch near the highwater mark it set late last year.
Last week, grocery stores played the role of victim as Amazon.com, Inc. (NASDAQ:AMZN) bought Whole Foods Market, Inc. (NASDAQ:WFM). Traditional grocers like Kroger Co (NYSE:KR) were killed as investors worried Amazon would leverage its extensive Prime ecosystem to finally make WFM affordable.
This week, the victims are sports retailers, with FL stock front and center.
Only a day after Amazon launched Prime Wardrobe, Goldman Sachs put out a research note which said that Nike Inc (NYSE:NKE) is likely to start selling its products directly through Amazon. Foot Locker, Dicks Sporting Goods Inc (NYSE:DKS) and Hibbett Sports, Inc. (NASDAQ:HIBB) are all down sharply in response.
It makes sense. The last two advantages brick-and-mortar sports retailers had (the in-store experience of trying things out, and a unique product line) are now slowly withering away. Not only can consumers now try out new sneakers before buying them from the convenience of their home, but it’s likely they’re also about to be able to grab Nike from the most ubiquitous e-tailer out there, making sports retailers obsolete.
Or are they?
I argue that this dip is actually a great buying opportunity for FL stock. Here’s why.
Why You Should Buy FL Stock
Prime Wardrobe and the potential of Nike selling through Amazon will hurt Foot Locker’s business, but only marginally. The opportunity here is that the stock is being priced for a cataclysmic change in operating performance.
That just won’t happen.
Investors should remember that much unlike other retailers, Foot Locker has successfully navigated its way through the retail carnage over the past several years. While other retailers have struggled to be comps-positive, Foot Locker’s comps have been rising in the mid-single-digit range. While other retailers have seen margins compress dramatically due to heavy discounting, Foot Locker’s gross margins have been stable around 33%-35%.
In other words, FL has managed to continue normal operations in an already exceedingly abnormal retail environment.
Yes, that environment promises to become even more abnormal with Prime Wardrobe and Nike selling through Amazon, but those are actually rather small changes in the bigger picture of what’s going on in retail.
FL shares, however, are acting like everything has changed dramatically — it hasn’t, which makes right now a buying opportunity.
Bottom Line on FL Stock
Foot Locker shares now trade below 10 times earnings, and that’s simply unheard of in this stock. Moreover, that’s against expectations that earnings will grow by high single digits over the next few years, making the P/E even more of a bargain. Foot Locker also sports a decent war chest of more than $1 billion, big cash flows and a growing dividend that is suddenly throwing off a decent yield of about 2.7%.
I see support kicking in soon. At this compressed a multiple, with such a strong balance sheet and cash flow situation, all of the bad is priced in and then some.
If the next couple of quarterly results show that things at Foot Locker are normal, expect FL stock to shoot higher in a collective gasp of relief.
The risk-reward asymmetry lies in favor of bulls at these levels.
As of this writing, Luke Lango was long AMZN, DKS, FL, KR and NKE.
