Foot Locker (NYSE:FL) has been all but ignored in the Nike news, which means good things for Foot Locker stock.
Nike (NYSE:NKE) just reported robust first quarter numbers that confirm that the athletic apparel giant is back to being its dominant self. Revenues rose 10%, including a healthy bounce-back in North America sales which rose 6%.
Gross margins expanded. Earnings rose nearly 20%. Importantly, the company addressed its recent controversial ad featuring NFL quarterback Colin Kaepernick, saying that the campaign drove record engagement with the brand.
Overall, it was a great quarter for Nike. But, Nike stock dropped on the news. Why? Valuation. Nike stock has already had its rally. It is up 35% in 2018, and trades at all-time high valuation levels. In other words, Nike stock is already priced for the Nike resurgence.
But, Foot Locker stock isn’t. Foot Locker is the premium retailer in the athletic footwear industry. Specifically, Foot Locker has deep ties with Nike, with about 70% of the company’s merchandise coming from Nike. Thus, if Nike is on fire, that presumably means Foot Locker is on fire.
Moreover, if Nike is set to have a record holiday season thanks to recent momentum, that means Foot Locker is set to have a record holiday season, too.
The great thing about Foot Locker is that it isn’t priced for this Nike resurgence. Nike stock trades at 30X forward earnings. The stock trades at 10X forward earnings. Nike trades at a big premium to its historically average valuation. Foot Locker trades at a big discount to its historically average valuation. Nike stock is up 35% year-to-date. Foot Locker stock is up 6%.
So, what’s the best way to play the Nike resurgence? Buy Foot Locker stock.
Nike Stock Is Priced for the Resurgence
First, let’s address what is meant by the “Nike resurgence”.
For several years, Nike was getting its butt kicked by Adidas (OTCMKTS:ADDYY) as the European sportswear company leveraged a return to retro styles and non-sport celebrity endorsements to boost the mainstream appeal of its brand, at the expense of Nike.
Nike started fighting back last year with the Consumer Direct Offense initiative, a three-prong strategy that included emphasizing direct sales, streamlining geographic investments, and accelerating product innovation.
This strategy has worked well and now Nike is back. Sales growth is robust, and the company is carrying this operational momentum into a holiday season that projects to be huge thanks to decade-high U.S. consumer strength and confidence.
As such, not only is Nike back, but this comeback is far from over.
Naturally, the best and most obvious way to play the Nike resurgence is through buying Nike stock. That is exactly what investors did at the start of the year. But with Nike stock up 35% year-to-date, trading at all-time high valuation levels, and failing to rally on really strong quarterly numbers, it is safe to say that Nike stock is maxed out.
In other words, it is already priced for the Nike brand resurgence, and as such, is no longer the best way to play that resurgence.
Foot Locker Stock Isn’t
What is the best way to play the Nike resurgence for the rest of 2018, including what should pan out to be a huge holiday season for Nike? Buy Foot Locker stock.
For all intents and purposes, Foot Locker is Nike’s footwear retailer.
Just shy of 70% of Foot Locker’s merchandise comes from Nike. Thus, if Nike is selling a ton of shoes (and they are, with North America footwear sales up 8% last quarter), that means Foot Locker is selling a ton of shoes, too.
If Nike projects to have a huge holiday season thanks to big product demand converging on robust consumer strength, that means Foot Locker projects to have a big holiday season, too.
I’m not the only one thinking this. While Nike stock dropped after its earnings report, Foot Locker rallied by more than 4%.
The attractive thing about Foot Locker stock is that, even after this recent rally, the stock still isn’t priced for the Nike resurgence, which will ultimately push revenue and profit numbers way higher over the next few quarters.
At 10X forward earnings, the stock isn’t priced for robust profit growth. At less than 1X sales, the stock also isn’t priced for any sort of big sales growth. And, FL stock is up just 6% in 2018, a gain which pales next to Nike’s 35% rally.
Overall, Foot Locker stock isn’t priced for the big Nike catalyst which will send shares soaring into the end of the year.
Bottom Line on FL Stock
Want to play the Nike resurgence? Forget Nike stock. It’s maxed out here and now. Instead, buy Foot Locker stock. It is far from being maxed out, and has a lot of room to run higher in the event that Nike remains the hottest brand in athletic apparel.
As of this writing, Luke Lango was long FL.