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

A Leading Footwear Business with Decent Market Presence: Foot Locker, Inc. (NYSE: FL) is a leading global retailer of athletically inspired shoes and apparel. The company operates through 3,160 stores in 27 countries, as well as websites and mobile apps, under the brand names Foot Locker, Champs Sports, Eastbay, Kids Foot Locker, Footaction, Lady Foot Locker, Runners Point, and Sidestep. In early 2019, the company realigned organization’s operating model into three distinct geographic regions – (1) Europe, Middle East, and Africa (EMEA), (2) Asia Pacific, and (3) North America – creating capacity for its teams to focus solely on growing the business within each region, while leveraging the global strength. With various marketing channels and experiences across North America, Europe, Asia, Australia, and New Zealand, total store count as on November 2, 2019 stood at 3,160 as compared with 3,221 and 3,266 stores at February 2, 2019 and November 3, 2018, respectively. A total of 138 franchised stores were operating at November 2, 2019 as compared with 122 and 118 stores at February 2, 2019 and November 3, 2018, respectively. The company built a positive momentum and posted improved financial results in FY18 with a record total sale of $7.9 billion and gross margin rate of 31.8%. To drive future growth through the capital program, FL invested ~$187 million into the business in FY18. Return on Assets (ROA) and Return on Invested Capital (ROIC) at 13.9% and 12% were above the previous year’s numbers of 7.3% and 11%, respectively. 

Looking at the historical performance over the period of FY09-FY18, the company’s total sales improved from $4.9 billion in FY09 to $7.9 billion in FY18, posting a CAGR of 5.45%. Earnings per share witnessed a CAGR of 27.21% over the same period with improving from $0.54 in FY09 to $4.71 in FY18.

Going forward, the business aims to stimulate and empower youth culture around the world, by fueling a shared passion for self-expression and creating unparalleled experiences at the heart of the sport and sneaker communities. The business is likely to utilize its various marketing channels and experiences across North America, Europe, Asia, Australia, and New Zealand for the above strategic goals. The company offers some of the largest online selections of athletically inspired shoes and apparel, while providing a seamless link between e-commerce and physical stores.


Historical Key Financial Highlights (Source: Thomson Reuters)

Q3FY19 Operational Highlights for the Period ended 02 November 2019: FL declared its quarterly results, wherein the company posted sales of $1,932 million as compared to $1,860 million in the previous corresponding period aided by growth across  direct-to-customers channel, increased by 11.4% on y-o-y basis. The business reported improvement in the direct-to-customers channel and continued to receive positive customer satisfaction through various e-commerce enhancements, including product availability. The business reported gross margin at 32.1%, improved from 31.6% in the previous corresponding period. Selling, general and administrative expenses (SG&A) stood at $411 million, higher from $398 million in Q3FY18 due to higher wages and an increase in costs incurred in connection with the ongoing investment in various technology and infrastructure projects.SG&A expenses, as a percentage of sales, stood at 21.3%, improved marginally from 21.4% in the previous corresponding quarter. The company reported a net income of $125 million as compared to $130 million in Q3FY18. The company’s net profit margin stood at 9.5% as compared to 8.9% during the previous corresponding quarter.


Selling General and Administrative Expense (Source: Company Reports)
 

Q3FY19 Income Statement Highlights (Source: Company Reports)

Other Business Highlights: The business reported an increase in comparable sales within the combined channels category, which was primarily driven by the footwear segment. Within the footwear category, the business witnessed growth across men’s and children’s footwear category which was offset by tepid demand from the footwear and women’s running segments. The business witnessed modest growth from court and casual footwear segment while sales from the basketball footwear segment showed momentum during the quarter. However, FL reported a decline in apparel and accessory sales across the wearer segments.


Third Quarter Operational Highlights (Source: Company Reports)

Balance Sheet Highlights: As on 02 November 2019, the business reported cash and cash equivalent at $744 million, while merchandise inventories stood at $1,304 million. The company’s operating lease right-of-use assets, during the end of the quarter, stood at $2,953 million. FL exited the quarter with total assets of $6,621 million. On the liability side, total current liabilities stood at $1,237 million, followed by long-term debt and long-term lease obligations at $122 million and $2,719 million as on 02 November 2019.

Segment-Wise Highlights: 
Within the North America segment, the Canadian business witnessed low double-digit growth in the comparable sales while Champs Sports, Foot Locker U.S., and Kids Foot Locker showed growth in high-single-digit. The business reported low-single digits growth in the Footaction, which was partially offset by a high-single-digit decrease in Eastbay’s sales. The decline in sales within the Eastbay’s was primarily due to softer demand for performance-related products, which is a continuation of the trend noted in the first half of the year. 

Within the EMEA segment, operating sales witnessed a growth of low single-digits primarily driven by growth in the e-commerce business for Foot Locker Europe and Sidestep. Asia Pacific segment, on the other hand, reported a growth of 26.7% on y-o-y basis, aided by e-commerce growth from Australia. The business witnessed growth in this operating on account of the expansion across Asia where the company operated 12 stores, as compared with 4 stores during the previous corresponding period.

9MFY2019 Performance Highlights:  Net income for the first nine months of FY19 stood at $357 million as compared to $383 million in pcp. Earnings per share on a GAAP basis came in at $3.23 against $3.28 per share for the corresponding period in FY18. 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 9MFY18. Year-to-date top-line at $5,784 million in 9MFY19 posted a yoy growth of 2.1%. YTD comparable store sales achieved a yoy growth of 3.8%.
 
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 Q3FY19, wherein FL reported a gross margin of 32.1%, improved from 30.1% in Q2FY19. The company reported operating margin at 8.5%, better than the industry median of 6.8%. Pretax margin during the quarter, stood at 8.9%, higher than the industry median of 5.3% and reported improvement over the previous quarter of 4.8%. ROE at 5.1% stood better than the industry median of 3.6%.

 
Key Metrics (Source: Thomson Reuters)

Valuation Methodology: Enterprise Value to Sales Multiple Approach    

Enterprise Value to Sales Based Valuation (Source: Company Reports)

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

Outlook: With its new strategic framework, imperatives and long-term objectives, the company has updated its 5-year financial targets for 2019 through 2023 period. FL continues to aspire to consistently be a top quartile performer and with this, expects a compounded annual sales growth in the Mid-Single Digit range. Sales per Gross Square Foot is expected to come in the range of $525 - $575. EBIT margin and net profit margin are likely to come in low double-digit and high single-digit, respectively.  Return on Invested Capital is anticipated to come in the Mid-Teens range and inventory turnover is expected at 3x-4x. The company will continue to build on the strong fundamentals while leverage its deepening customer connections to reach these new goals and adapt to the rapidly changing marketplace. 
 
Stock Recommendation: The stock of FL is trading at $39.29 with a market capitalization of $4.10 billion. The stock is trading at the lower band of its 52-week trading range of $33.12 to $68. The stock has generated negative returns of 10.60% and 4.31% in the last three months and six months, respectively. 

The management is creating exciting strides in executing the four strategic imperatives, which ensures that the company is well placed to compete within the retail segment. The company intends to inspire and empower youth culture and focuses on strengthening the bottom-line and driving value to its shareholders. Considering the above factors, we have valued the stock using an Enterprise Value (EV) to Sales based relative valuation method. For this, we have taken peers like TJX Companies Inc (NYSE: TJX), Gap Inc (NYSE: GPS), Urban Outfitters Inc (NASDAQ: URBN), etc., and arrived at a target price with lower double-digit upside (in % terms).  Hence, we give a “Buy” rating on the stock at the current market price of $39.29, up 1.13% as on 29 January 2020. 
 
 
FL Daily Technical Chart (Source: Thomson Reuters)

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