Friday, 20 November 2015

Foot Looker - some thoughts after today's Q3 numbers

I was asked to take a look at the prospects for the footwear retailer Foot Locker who have a pretty broad range of interests across the performance to lifestyle spectrum.  


Third quarter numbers today looked pretty strong with high single digit comparable-store sales and higher margins... 

...and the share - after a bad recent run inline with a generally poor current retail performance backdrop - bounced up 7-8% as I write to north of US$65 again (postscript: stock more like US$63s now).


So a good reaction...and it is hard not to agree with Jim Cramer here who noted:

"When you carry Nikes(NKE) you win. Pretty simple formula."

Of course it is a little more complex than that. Nevertheless the tone of the conference call was pretty solid.  Notes I made during the call included: 

‘leadership position in lifestyle running’

‘strong sales and performance…our success has been remarkably consistent across multiple geographies’ (note the growth of internet sales for example): 

Footlocker Europe ‘outstanding’ (recall the company is under-penetrated in Europe as noted in the graphic below)

US$360m worth shares bought back this year (getting on for 4% of market cap nicely augmented by a 1.6% dividend yield)

‘very strong balance sheet…and well funded pension plan’ (with over US$800m of net cash you can see what they mean).  

Litigation couple hundred million, got £100m accrual (see here for some background on this issue.  I don't really see this as a big factor.  On the call management appeared confident it is unlikely to be an issue).  

One negative I did note however was that Apparel more patchy.  This accounts for around 20% of sales but management appear confident of the scope for new products.  

In terms of ebit progression historic progression has been pretty good...


...and even though the litigation expense attribution mucked up the numbers a little YTD...


...extrapolation (always a dangerous factor in the investment world of course) would suggest the below targets are do-able:


Retail always has plenty of challenges and predictive difficulties but a market performer/leader currently sitting on (litigation accrual cost included) of around x10 EV/ebit is no disaster - and frankly even half achievement here of the balance of the 2020 target opens up new 52 week highs.  

Today - particularly following the big bounce in the shares - I would chill but unless there is a major macro reason for getting cautious about the consumer space I like the look of Foot Looker at or below US$60 a share.

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