Buy Foot Locker Stock as the Company Finds Its Groove Again

Foot Locker is back, and that means the rally in Foot Locker stock has legs

In 2017, shares of Foot Locker (NYSE:FL) fell off a cliff after the athletic footwear retailer reported slowing growth and falling margins amid what investors perceived as the retail apocalypse. For most of 2018, Foot Locker stock tried to bounce back, as growth came back and margins improved amid a broadly strengthening retail backdrop.

fl stock Foot Locker stock
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But, that rebound has been tepid relative to the 2017 decline. FL stock rallied less than 15% in 2018, and is still 25% off its late 2016 highs.

The implication? It’s not too late to buy into the FL stock recovery rally. In the big picture, Foot Locker is getting its groove back as a go-to retailer of premium athletic footwear.

For a while, this was how Wall Street perceived the brand, and that’s why FL went from under $10 in late 2009, to nearly $80 in late 2016. But, slowing growth, falling margins, and a shift in the athletic retail landscape from wholesale to direct caused investors to question Foot Locker’s long term growth trajectory.

Those questions are finding answers now, and the answers are broadly positive. The athletic retail scene is shifting from wholesale to direct, but not entirely so. What remains in the wholesale channel is being more heavily dedicated to premium players like Foot Locker.

Thus, Foot Locker is now taking home bigger share of a smaller market with less competitors, and that means slow and steady is the new norm for growth going forward.

Slow and steady isn’t priced in at just 12x forward earnings. As such, as Foot Locker finds its groove over the next several quarters, Foot Locker stock will continue to rally.

Foot Locker Is Back

For a while, Foot Locker was the envy of every other retailer. Comparable sales growth was consistently north of 4%. Margins were roaring higher. Sales and profits were roaring higher, too. Brand equity was high. Staying power was viewed as a sure thing.

Then, the athletic retail scene underwent a dramatic shift. Specifically, big brands like Nike (NYSE:NKE) started taking note from Lululemon (NASDAQ:LULU), and doubled down on a direct sales strategy. That came at the expense of wholesale partners like Foot Locker. Comparable sales at FL fell into negative territory. Margins dropped. Profits were wiped out.

Now, though, Foot Locker is bouncing back from that lull. As it turns out, the athletic retail scene is shifting. But, athletic brands can’t ignore the wholesale channel entirely, since that channel still has a ton of reach.

Thus, while athletic brands want to downsize the wholesale channel and up-size the direct channel, they also want to maintain a healthy sized wholesale channel with better allocation so as to optimize reach and brand equity.

The rough translation? Athletic brands are pulling product from low value and low reach wholesale partners, and putting it into a split of their own direct channels and high value and high reach wholesale partners.

Foot Locker is one of those high value and high reach wholesale partners. As such, Foot Locker projects to control bigger market share of a smaller market going forward, implying lower but steadier growth.

This thesis is already materializing. Comparable sales growth has recently turned back into positive territory. Margins are turning around. Profit growth is coming back into the picture.

Foot Locker just boosted its quarterly dividend by 10%, approved a new $1.2 billion share repurchase program, and authorized a $275 million capex program for 2019. You don’t do those things unless operations are stabilizing and improving.

Thus, in the big picture, Foot Locker is back, and that’s great news for Foot Locker stock.

Foot Locker Stock Has Room to Run

Going forward, Foot Locker should be characterized by steady, low single-digit comparable sales growth, gradual margin stabilization and improvement, and a healthy pace of buybacks. That combination should power fairly consistent mid to high single digit profit growth.

At current levels, FL stock isn’t priced for such a healthy profit growth outlook.

FL stock trades at just 12 forward earnings. Back at its peak, FL stock featured a forward earnings multiple close to 20. Meanwhile, the stock market trades at 16 forward earnings.

Most apparel retail stocks trade at 17x forward earnings. Most footwear stocks trade just shy of 30x forward earnings. The whole consumer discretionary sector trades around 20 forward earnings.

No matter the comp, FL stock is very cheap here. Over the next several years, as growth stabilizes and improves, Foot Locker will consequently benefit from a double tailwind of earnings growth and multiple expansion.

Bottom Line on FL Stock

Foot Locker is getting its groove back, and growth going forward will both stabilize and improve. As it does, Foot Locker stock, which is still more than 25% off all time highs and trades at just 12 forward earnings, will continue to rally.

As of this writing, Luke Lango was long FL and NKE.


Article printed from InvestorPlace Media, https://investorplace.com/2019/02/buy-foot-locker-stock-as-the-company-finds-its-groove-again/.

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