Footlocker: Growth at a Good Price - Trinity SMF
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Footlocker: Growth at a Good Price
Sector Manager: Laura Gallagher
Senior Analyst: Isaac Punch
T R I N I T Y S M F
Investment ThesisT R I N I T Y S M F
Summary of Investment Thesis
Why this company?
• Strong Brand Image: Foot Locker is an internationally recognized brand for excellence in athletic shoes and
apparel. Management has been able to successfully use this to increase popularity in other niche markets
like Women’s Foot Locker, Kids Foot Locker, and Runners Point.
• Strong Supplier Relationships: Foot Locker works closely with major suppliers to deliver high-quality
athletic shoes and apparel to customers. Due to their wide distribution, FL is able to squeeze costs and get
contracts from these suppliers at favorable rates.
• Strong Financials: Foot Locker has very low levels of debt and has strong comp growth and increasing
operational and product margins.
Why now?
• Growth: continues to achieve broad-based and consistent strength across geographies, banners, channels,
and categories. There is growing demand for high end running and athletic gear, particularly in the
countries to which FL is expanding and FL is positioned to capitalize on this.
• Fairly priced: FL is positioned to benefit from the stellar performance of sportswear companies such as
Nike in the last year, but is trading at a major discount to these brands. This is due to a recent stock decline
caused by the lack lustre performance of the US retail industry generally.T R I N I T Y S M F Company Overview
T R I N I T Y S M F
Introduction: Company Snapshot
Recommendation BUY
Price Index for Foot Locker, 2014-2015
135
Current Price $65.08
130 Price Target $79.32
125
Upside 21.9%
120
115 Timeline 3-4 years
110
Market Cap. $9bn
105
100
52wk range $51.12-$77.25
95 P/E 17.7
90
Div. Yield 1.51%
85
12/1/14 1/1/15 2/1/15 3/1/15 4/1/15 5/1/15 6/1/15 7/1/15 8/1/15 9/1/15 10/1/15 11/1/15 12/1/15 FCF Yield 5.76%
Foot Locker MSCI World Index MSCI Consumer Discretionary Index
Analyst Consensus BUYT R I N I T Y S M F
Business Overview
Sales Breakdown
• Foot Locker is a leading retailer of athletic shoes and apparel, with more
than 3,400 specialty stores around the world. 12%
Direct to
• Foot Locker operates in two reportable segments: Athletic Stores and Direct- Customers
to-Customers. Athletic Stores
• The Athletic Stores segment is one of the world's largest athletic 88%
footwear and apparel retailers with banners Foot Locker, Lady Foot
Locker, Kids Foot Locker, Champs Sports, Footaction, Runners Point and
Sidestep.
• The Direct-to-Customers segment includes Footlocker.com and other
22%
affiliates, including Eastbay, which sell to customers through websites, Footwear Sales
mobile devices, and catalogs.
Clothing &
Accessories
78%T R I N I T Y S M F
Business Overview
Store Composition
• Foot Locker has stores in 23 countries in North America, Europe, Australia, 116 83
and New Zealand. The retailer generates around 70% of its sales in the US. Foot Locker
Europe is its next largest market, where it has annuals sales of $2 billion. 547 Lady Foot Locker
Kids Foot Locker
• The company also operates 78 franchised stores, of which 31 are in the 272
1835
Footaction
Champs Sports
Middle East, 27 in Germany and Switzerland, and 20 in the Republic of 357 Runners Point
Korea. 198 Sidestep
• Foot Locker is heavily dependent on athletic shoe giant Nike --
which supplied 73% of its merchandise in 2015. Four other key suppliers Geographical Spread
(including Adidas) supplied another 16%. The company's close relationship United States, Puerto
with Nike has also helped fuel growth as Nike has seen its own double-digit 91 Rico, Virgin Islands &
Guam
sales growth for the last several years. Foot Locker is Nike's most important Canada
vendor, representing close to 20% of its sales. This relationship enables 603
Foot Locker to get exclusive Nike products, which have made it a winner 1,015 Europe
with shoe-buyers. In addition to this, due to their wide distribution, FL is
126 Austrailia & New
able to squeeze costs and get contracts from these suppliers at favorable Zealand
rates.T R I N I T Y S M F
Management
Richard Johnson: Director, President & CEO
Mr. Johnson has served as the Company's President and CEO since 2014. He was previously Executive Vice President and Chief
Operating Officer. He joined Footlocker in 2007.
Kenneth Hicks: Chairman of the Board
Mr. Hicks has been the chairman of the board since early 2010 and was President and CEO from 2009- 2014. Mr. Hicks has
substantial retail experience where, before Foot Locker, he worked at both J.C. Penny Company, Inc. (JCP) and Payless ShoeSource.
Lauren Peters: Chief Financial Officer
Ms. Peters has been with Foot Locker since early 2002, where she began as the Senior Vice President of Strategic Planning. She
held that role for a total of nine years. Prior to Foot Locker, Ms. Peters served as Vice President and Controller of the Registrant’s
Financial Services Center.T R I N I T Y S M F
Strategy
• Improved Efficiencies:
In reaction to a general move away from brick and mortar stores, the last few years have seen the closure of underperforming stores
in lieu of investment in remaining stores. The stores have also become more unique by adding departments like House of Hoops,
Puma Labs, and Adidas Collector Shops. There is also a special effort on keeping the product and the store experience fresh and new,
remodeling stores and updating selections constantly. The company has set a goal of reaching $10 billion in sales by 2020, up from
$7.5 billion last year, and increasing its sales per square foot by more than 20% to $600.
• Diversification: Improving in childrenswear and apparel
In 2015, more than one-third of Foot Locker's 86 store openings were Kids Foot Locker stores, while another 20% of openings were
Champs Sports or Runners Point stores. At the same time, the retailer closed 32 Foot Locker stores and 44 Lady Foot Locker Stores.
• International Expansion:
With sales maturing in the US, Foot Locker has been closing domestic stores in favor of expanding into other countries (particularly in
Europe) to become the leading global retailer of athletic shoes and apparel.
• Digital Expansion: Integrating the stores and direct to customers businesses
Online sales have been the fastest growing portion of the Company for the past several years. Foot Locker strives to create seamless
customer experiences across the store, digital, and mobile channels, and as a result Foot Locker internet sites collectively have
posted exceptionally rapid growth, increasing almost 40% annually over the last three years.T R I N I T Y S M F
Sector News & Trends
• The Shoe retail industry is similar to other retail industries in that it is heavily reliant
upon customer spending and customer confidence. An improved economy gives rise to
increased customer spending on shoes for fashion rather than necessity, which will
drive sales for Foot Locker. In addition to this, the price of shoes are expected to rise in
the coming years.
• We expect strong discretionary spending in the coming years in the countries in which
Foot Locker operates, with a large amount of exposure to the US, Canada and Europe
(mainly Germany).
• The industry is also likely to benefit from increased demand for sporting clothing and
equipment as the percentage of individuals playing sports increases. Athletic apparel
sales have been soaring, pushing the stocks of manufacturers like Nike Inc and Under
Armour to record highs thanks to a fashion trend known as athleisure. Workout-style
clothes have become more acceptable as casualwear. That trend has also favored sales
of sneakers, Foot Locker's core product. The chain has a 45% share of the market for
basketball shoes, which tend to be expensive and high-margin, and from which the
company derives half of its sales.T R I N I T Y S M F
Industry & Competitive Positioning
• Foot Locker is the leading athletic footwear retailer in the US in terms of sales as well as profitability.
• Foot Locker's main competitor in the athletic footwear and apparel specialty retail market is Finish Line, whose $1.82
billion sales in 2015 significantly trailed Foot Locker's $7.15 billion. In addition, Finish Line only operates stores within
the US whereas Foot Locker has significant international operations. Due to it’s larger size, Foot Locker is known for its
exclusive products from major brands such as Nike, and this creates a major competitive advantage for FL over Finish
Line.
• Foot Locker also competes with other retailers that sell athletic footwear as part of their overall product mixes,
including:
• Dick's Sporting Goods: remains best known as a general sporting goods store, not a purveyor of high-fashion
fitness trends, and thus is struggling to keep up with Foot Locker in its shoe department.
• Wal-Mart Stores and Target are one-stop shopping retailers that offer a limited selection of athletic footwear and
apparel in their stores.
• Suppliers such as Nike, Adidas and Under Armour could to some extent cut out the middle man and sell directly
to customers in the years to come. For now, Foot Locker remains a huge distributor for these companies and so is
benefitting from their success. In addition to this, FL is significantly undervalued compared to these companies.T R I N I T Y S M F Company News • Last quarter Foot Locker hiked its quarterly dividend by 13.6% to 25, thereby bringing the annual dividend to $1.00. This marks the company’s fifth consecutive annual dividend increase as it continues to progress with its strategy of paying regular dividend and increasing it at feasible intervals. • Apart from paying dividends, the company is involved in the practice of enhancing shareholder value by regularly buying back its common stock. This is evident from the company’s approval of a three year share repurchase program in February worth $1 billion, up about 66.7% from the prior level of $600 million, which was successfully completed earlier this year. The program will extend through Jan 2018. This marks the third consecutive year in which the company has increased the value of its share buyback program. • There is growing demand for high end running and athletic gear in Europe and FL is positioned to capitalize in this region and others. In 2013, FL acquired Runners Point, a specialty athletic store and online retailer headquartered in Germany, as it continued its expansion plans into the strongest economy in Europe. The deal, valued at €72 million, gave Foot Locker shops in Germany that operated under the Runners Point and Sidestep banners, as well as stores in the Netherlands, Austria, and Switzerland.
T R I N I T Y S M F Financial Overview
T R I N I T Y S M F
Financials
Summary
Total Revenue 7.78bn Gross Margin 32.37%
EBITDA 948 EBITDA Margin 14.48%
ROE 20.77% FCF Margin 7.135
Total Debt 132m FCF Yield 5.76%
Total Debt/Equity 0.1 Div. Yield 1.51%
We have seen outsized earnings growth for Foot locker:
1. Higher Comp Sales: In Q3, comp sales were up 8.7%, a rapid pace that FL has been able to maintain throughout 2015.
The company has shown momentum in most or all of its major merchandise categories this year, pushing sales higher
via effective pricing and merchandising.
2. Rising Product Margins: Q3 saw product margins move up 60 basis points to 33.8%. FL's strong pricing and ability to
gain sourcing efficiencies has produced higher profitability on its higher sales levels.
3. Rising Operating Margins: the higher comp sales level has provided some leverage on the company's expenses, as
that rate improved 80 basis points during Q3 to 19.6%.T R I N I T Y S M F
Income Statement
2014A 2015E 2016E 2017E 2018E
Revenue 7,151 7,776 8,195 8,629 9250
Revenue Growth 9.9% 8.7% 5.4% 5.3% 7.2%
Operating 809 928 1,021 1,087 1,245
Income
EBITDA 948 1,074 1,182 1,262 1,388
Net Income 520 600 652 702 777
Diluted EPS 3.56 4.34 4.84 5.39 5.93
EPS Growth 24% 21.9% 11.5% 11.4% 10%
DPS 0.88 1.00 1.08 1.18 1.39
DPS Growth 10% 14% 8% 9.2% 18%T R I N I T Y S M F
Balance Sheet & Cash Flow Statement
2014A 2015E 2016E 2017E
Cash and Equivalents 967 995 1,019 1,049
Total Assets 3,577 3,686 3,775 3,888
Total Debt 132 134 133 136
Total Liabilities 1,081 1,106 1,132 1,166
Shareholders Equity 2,496 2,580 2,643 2,722
Cash Flow Operations 712 835 910 967
Cash Flow Ops Growth 34.3% 17.2% 8.9% 6.3%
Cash Flow Investing (176) (221) (235) (208)
Cash Flow Financing (401) (483) (519) (558)
Capital Expenditure (190) (231) (234) (244)
Free Cash Flow 522 604 676 723
Free Cash Flow Growth 61.1% 15.7% 11.9% 6.95%T R I N I T Y S M F
Debt Analysis
• Foot Locker currently has one outstanding corporate bond which is due in 2022. It pays a fixed rate coupon
on 8.5% and has a principal of $119.6m.
• Foot locker is in a solid position to repay this bond and is in a preferable position in relation to the industry
average on all debt coverage ratios.
Capital Structure (in billions)
0.131, 5%
Debt
Equity
2.5, 95%T R I N I T Y S M F Valuation
T R I N I T Y S M F
Valuation
Sales
EPS Gr. Mkt.
Name P/E Fwd P/E P/S Div Yield ROE YTD. Perf EBITDA per Sq.
2015 Cap
Foot
Foot
17.7 13.92 1.24 11.41% 1.51% 20.70% 19.34% 9,000
Locker 948 $490
Nike 32.3 25.97 3.6 14.33% 0.90% 17% 34.39% 4,824 108,960
Adidas 27.4 21.6 1.1 12.7% 1.68% 8.82% 65.95% 1,288 17,900
Skechers 20.1 13.67 1.53 38.86% - 19% 59.10% 252 45,800
Puma 81.6 21.5 0.9 (42.2%) 0.30% 4.20% 17% 179 2,900
Mean
35.82 19.33 1.67 7.02% 1.10% 13.94% 39.16%
ValueT R I N I T Y S M F
Implied Multiples Valuation
Median Industry EV/EBITDA Model
Metric Implied Price Weight
Value
EBITDA: 1074 Low Base High
P/E 27.4 98.19 25%
EV/EBITDA 7 8.5 10
FWD P/E 21.5 97.97 25%
EV 7,518.00 9,129.00 10,740.00
P/S 1.24 71.5 50%
+ Cash 967.00
84.79
Average Price
(+31.2%) - Debt 134.00
Value of Equity 8,351.00 9,962.00 11,573.00
No. Shares 137
Per Share Value ($) 60.96 72.72 84.47
Potential Upside -3.30% 14.66% 33.20%T R I N I T Y S M F
Discounted Cash Flow Valuation
2015E 2016E 2017E 2018E 2019E Growth Rate
EBIT 1067 1174 1250 1430 1543 45%
Dep & Amor 163 172 181 194 202 24%
Def. Taxes 20 20 20 20 20
Changes WC 41 45.8 46.9 48.2 49.4 21%
Capital Exp. 231 234 244 235 243 5%
Taxes 373 411 438 501 540 45%
Total FCF 604 676 723 861 933
Discounted Cash Flow Valuation
Terminal Growth 3% Total Enterprise Value €11,880.20
WACC 8% Total Equity Value €11,047.20
Estimated Value per share €80.48 (+24.7%)T R I N I T Y S M F
Football Field Valuation
Implied Price
86
84.79
Target Price: $79.32 (+23%)
84
82 Equal weighting has been
80.48
attributed to each valuation
80
method used.
78
Share Price ($)
76
74
72.716
72
70
68
66
Implied Multiples EV/EBITDA- Average DCF
Axis Title
Implied PriceT R I N I T Y S M F Risk
T R I N I T Y S M F
Qualitative Risk
• Foot locker has a lot of exposure to a small amount of suppliers. FL is very exposed to any poor performance of Nike or
its other large suppliers. However, Nike has continuously reassured us of continued strength in the future, and FL will
be a main beneficiary of that.
• Foot Locker could lose business to competitors such as Nike and Adidas which which could sell increasingly more
product directly to consumers, cutting out the middleman. Nevertheless, FL remains a major distributor for these
brands.
• Footlocker operates in a highly cyclical industry, which gives rise to economic risk. Re-emerging macro headwinds in
Europe may hinder future expansion into the region. If this slowed growth continues, it may hinder one of FL's main
growth expansion opportunities in the future and have a negative effect on FL's stock price.
• FL is very exposured to currency risk due to its geographic breadth. Despite an 8.7% jump in comparable-store sales in
the last quarter, Foot Locker's total sales rose only 3.6% year over year as foreign currency headwinds hurt sales by
approximately $90 million. Excluding the negative impact of foreign currency fluctuations, total sales increased 8.9%.T R I N I T Y S M F
Quantitative Risk
1 Yr 2 Yr
Expected Return 0.000644625 0.0011199
Standard Deviation (volatility) 0.016445719 0.01555088
Skew -0.88837794 -0.2981164
Kurtosis 4.308602198 4.72231066
Beta 0.6971407 0.83481412
RSQ 0.169629457 0.204885
Sharpe -1.70238825T R I N I T Y S M F
Portfolio Positioning & Current
Holdings
• As a sector consumer discretionary is currently underweight.
• Footlocker would not conflict with any of our existing holdings within in the consumer
discretionary sector.
• It would give us exposure to the high street retail and sporting industry.
• It would add exposure to the dollar; the sector is also underweight (-4.8%) of the dollar
versus the MSCI World.
• It would add exposure to the USA, Canada, Europe (in particular Germany), and also
exposure to the Middle East and Korea through its franchises.
• It would position us to benefit from the retail recovery in the UK and Europe.T R I N I T Y S M F
Summary of Investment Thesis
• There is growing demand for high end running and athletic FL is positioned to capitalize on this.
• Footlocker has unique supplier relationships which allows them to benefit from many exclusive products
which mean they are outpacing the competition.
• Footlocker is diversifying. Management has been able to successfully use this to increase popularity in
other niche markets like Women’s Foot Locker, Kids Foot Locker, and Runners Point. As well as this, the
brands have been expanding around the world.
• Footlocker has a strong balance sheet has seen great growth in sales in recent quarters. In addition to this,
it has seen improvements in both product and operational margins, suggesting greater efficiencies.
• Foot Locker recently experienced a stock decline, due to an general industry trend, however we see no
slowdown in growth. Therefore we see a potential upside for Footlocker of about 23%.You can also read
