Company Overview: Foot Locker, Inc. is a retailer of shoes and apparel. The Company operates through two segments: Athletic Stores and Direct-to-Customers. The Company is an athletic footwear and apparel retailer, which include businesses, such as include Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep and SIX:02. The Direct-to-Customers segment is multi-branded and sells directly to customers through Internet and mobile sites and catalogs. The Direct-to-Customers segment operates the Websites for eastbay.com, final-score.com, eastbayteamsales.com and sp24.com. Additionally, this segment includes the Websites, both desktop and mobile, aligned with the brand names of its store banners (footlocker.com, ladyfootlocker.com, six02.com kidsfootlocker.com, champssports.com, footaction.com, footlocker.ca, footlocker.eu, runnerspoint.com and sidestep-shoes.com).
 

FL Details

Product Innovation Led to Better Business Visibility: Foot Locker, Inc. (NYSE: FL) is one of the leading athletic footwear and apparel retailers in the world, operating more than 3,000 stores across 27 countries. The company operates with the brand name, ‘Foot Locker’ and offers premium quality for the active lifestyle customer. The company also operates through websites and mobile applications, aligned with the brand names of the store banners. The sites offer a seamless link between e-commerce and physical stores, while the products are also listed with third-party websites such as eastbay.com, final-score.com, and eastbayteamsales.com. FL is the pioneer of the Power Store concept across North America, the U.K., and Asia. The business introduced new stores in Detroit and Philadelphia, London and Liverpool in the U.K., and Hong Kong. The stores featured with local-centric product along with local activations, which were constructed by local artists, and staffed with associates hired directly from the local community.

For the period ended on 02 February 2019, total net revenue stood at $7,939 million, up 3.3% on $7,687 million on pcp. Net profit for the company was recorded at $547 million, up 7.3% on y-o-y. Looking at the past performance over the period of 31 January 2015 to 02 February 2019, FL delivered a CAGR growth of ~2.6% in revenue, while net profit witnessed a CAGR growth of ~1.2% during the same period. 

During the third quarter ended as on 02 November 2019, FL opened 11 new stores, remodeled and relocated 34 stores, while closed 25 stores. As on 02 November 2019, the company operated 3,160 stores across 27 countries in North America, Europe, Asia, Australia, and New Zealand. In addition, 128 franchised Foot Locker stores were operating in the Middle East as well as ten franchised Runners Point stores in Germany. The company reported the operation of 133 franchised stores as of 03 August 2019 as compared to 122 and 117 stores as on 02 February 2019 and 04 August 2018, respectively. Revenue from the franchised stores was not significant for any of the periods presented, while these stores are not included in the operating store count above.

Going forward, the company will be focusing on delivering new, immersive, and innovative experiences to the customers that generate excitement and create a connection with the product. The business is focusing around trust-building and developing authentic relationships with the customers at a hyper-local level.


Five-Year Income Statement (Source: Company Reports)

Financial Highlights for the Quarter ended 02 November 2019: For the period, the company reported sales of $1,932 million as compared to $1,860 million in the previous corresponding period. Cost of Selling, general and administrative expenses stood at $411 million as compared to $398 million during the prior corresponding period. The business reported the cost of sales at $1,312 million as compared to $1,272 million, depicting 67.91% of the total sales. SG&A to sales stood at 21.27% of total sales as compared to 21.40% in the previous corresponding period. The company reported net income at $125 million for the period ended 02 November 2019 as compared to $130 million in pcp.


Financial Highlights (Source: Company Reports)

Financial Highlights for the Period ended 03 August 2019: During the period, the company reported sales of $1,774 million as compared to $1,782 million in the previous corresponding period. Excluding the effect of foreign currency fluctuations, total sales increased by 0.8% on y-o-y basis. During the quarter, the company’s direct-to-customers channel generated positive comparable sales as compared with the prior corresponding period. The penetration of the direct-to-customer channel increased by 80 basis points to 14.3%. The company reported net income at $60 million as compared to $88 million in pcp. From the product perspective for the combined channels, the increase in comparable sales for both the quarter and year-to-date periods was primarily driven by footwear. For the period ended 03 August 2019, the increase was partially offset by a decline in apparel sales, while within the footwear category, sales of women’s and children’s footwear witnessed growth. Court and casual footwear styles continued to resonate well with the customers, while sales of men’s footwear, particularly sales of basketball styles, were negatively affected by the timing of certain product launches and declined slightly for the quarter as compared with a low single-digit increase for the year-to-date period. Apparel sales declined for both the quarter and year-to-date period across all wearer segments.


Financial Highlights for the Quarter ended 03 August 2019 (Source: Company Reports)

Gross Margin: Gross margin is calculated as sales minus cost of sales. Cost of sales includes expenses related to merchandise, freight, distribution including related depreciation expense, shipping and handling, occupancy and buyers’ compensation. Under the occupancy costs, the business includes rent, common area maintenance charges, real estate taxes, general maintenance, and utilities. The business reported gross margin at 30.1% during the second quarter as compared to 30.2% in pcp. The decline in merchandise margin rate reflected a higher proportion of direct-to-customer sales, which bear a higher freight cost. The occupancy and buyers’ compensation expense rate decreased as a result
of higher sales as compared with a relatively fixed rent cost.


Gross Margin for thirteen weeks ended 03 August 2019 (Source: Company Reports)

Selling, General and Administrative Expenses (SG&A): The company reported selling general and administrative expense at $393 million in the second quarter as compared to $380 million in pcp. SG&A, as a percentage of sales stood at 22.2%, up from 21.3% in pcp. The increase in SG&A was primarily attributable to the higher wages and an increase in costs incurred in connection with the ongoing investment in various technology and infrastructure projects. Other factors include higher corporate expense and higher share-based compensation that is related to the Company’s performance.

 
Selling General and Administrative Expenses (Source: Company Reports)


Stores Sales (Source: Company Reports)

Revenue Bifurcation based on Geography for the period ended on 03 August 2019: Revenue from the United States stood at $1,209 million during the quarter as compared to $1,220 million in the previous corresponding period, representing 68.15% of the total revenue. The international segment delivered $565 million of revenue, improved marginally from $562 million in pcp. The international segment represents 31.85% of the total revenue.


Geographic bifurcation of Revenue (Source: Company Reports)

Nine-Months Operating Highlights for the period ended 02 November 2019: The company reported sales of $3,852 million in year to date, up 1.2% from $3,807 million in pcp. The business reported a sales growth of 2.9% on y-o-y basis, excluding the effect of foreign currency fluctuations. During the period, the store’s channel generated positive comparable sales results, aided by the improvement in the direct-to-customers channel, followed by positive customer satisfaction from various e-commerce enhancements. Net income for the company’s first nine months stood at $357 million as compared to a net income of $383 million. On a GAAP basis, earnings per share for the nine-month period stood at $3.23 per share as compared to $3.28 per share for the prior corresponding period. On a non-GAAP basis, earnings per share for the nine-month period totaled $3.32 as compared to $3.16 per share earned in the same period last year.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 45.61% of the total shareholding. The Vanguard Group, Inc. and BlackRock Institutional Trust Company, N.A. hold the maximum interests in the company at 9.40% and 8.55%, respectively.

Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: The company reported mixed numbers in Q2FY20, wherein FL reported Gross margin at 30.1% as compared to 30.2% in Q2FY19. Quick ratio stood at 1x, higher than the industry median of 0.39x. The business reported a long-term debt to total capital at 4.7%, improved from 4.5% of Q1FY20. RoE and ROIC stood at 2.3% and 1.1%, respectively, in Q2FY20.


Key Metrics (Source: Thomson Reuters)

Guidance: The business is looking for revenue growth of mid-single digit on a CAGR basis for the period of FY19 to FY23.  The company targets to improve its sales per gross square foot at $525 to $575. Over the same period, the business is looking for low double-digit growth in adjusted EBIT margin and high-single-digit growth adjusted net income margin. The business is targeting return on invested capital at ~12% during FY19 to FY23.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:

Method 1: Price to Cash Flow Multiple Approach:

Price to Cash Flow Based Valuation (Source: Thomson Reuters), *NTM-Next Twelve Months

Method 2: Enterprise Value to EBITDA Multiple Approach:

EV/EBITDA Based Valuation (Source: Thomson Reuters), *NTM-Next Twelve Months

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: The stock ended at $39.23 with a market capitalization of ~$4.199 billion as on 04 December 2019. The stock is quoting at the lower band of its 52-week trading range of $33.12 to $68.00. The stock has generated a negative return of 4.176% and 28.581% in the last six months and one year, respectively.   The company is focused on improving the breadth and depth of top trending footwear and apparel assortments. The company is taking steps to share the excitement and energy of sneaker culture with the consumers. In collaboration with the partners at Brand Jordan, the company opened a new Jumpman Store in Los Angeles. In addition to curated Jordan collections, this pinnacle retail experience offers footwear and apparel customization spaces, a Flight Lab, and Flight Lounges, while the company further upgrades the North America digital sites to a new, more responsive platform and launches the reimagined mobile apps. The company has created the success of the strategic focus by building deeper connections with the customers and further strengthening relationships with the vendors. Considering the aforesaid facts, we have valued the stock, using two relative valuation methods, i.e., Price to Cash Flow multiple, and Enterprise Value to EBITDA multiple, and arrived at a target price of low double-digit growth (in % term). Hence, we recommend a “Buy” rating on the stock at the closing market price of $39.23, up 1.98% on 04 December 2019.
 

FL Daily Technical Chart (Source: Thomson Reuters)

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