By: Robert J. Scrudato
Foot Locker Inc. (FL) stock has experienced a largely positive year in the retail space, growing roughly 30% in value since the beginning of 2014. After buying out fellow athletic retailer, Runners Point, early in the year, the internationally-renowned retail business seemed poised to combat a largely volatile sales environment. Indeed, a combination of weak foot traffic, poor consumer confidence as depicted by the Consumer Confidence Index of the US, and a disinterest in most high-priced apparel by the consumer presented significant headwinds across the industry. However, top- and bottom-line advances on a year-over-year basis would come to fruition with consistency.
At this juncture, we question if these shares are suitable for investors seeking a position in the soft lines retail space. Also, we examine its potential to deliver long-term value in a market that has shifted so rapidly, and now requires increased promotional activity to keep pace at the top line. All the while, Foot Locker has introduced a new CEO to execute its plan of international brand expansion. In this article, we will address these issues by taking a brief look at Foot Locker’s business by performing an easy-to-follow SWOT analysis of the company, evaluating its Strengths, Weaknesses, Opportunities, and Threats.
Business
Foot Locker is a leading global retailer of athletically inspired shoes and apparel. It was initially created as the product of a merger between the F.W. Woolworth Company and Kinney Shoe Corporation in the early 1960s. By the year 2001, the company had predictably grown at an exponential rate. Based on superior sales at “Foot Locker”, its top performing line, management made the decision to change the company name to Foot Locker Inc. Since that time, it has completed the purchase of Foot Action, which consisted of about 350 stores, and most recently Runners Point Group, which possessed more than 200 athletic retail outlets in Germany. To date, it operates roughly 3,470 Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, and Foot Action stores in North America, Europe, Australia, and New Zealand. Consisting of more than 43,000 employees, its primary headquarters is located in midtown Manhattan, New York, and annualized revenues for fiscal 2013 eclipsed $6.5 billion.
Strengths
Strong Business Relationships: As an athletic retailer, quite possibly the largest key to success is maintaining a product line that features brands with excellent consumer loyalty. This can help relate the name of the retail outlet with the trusted product. For years Foot Locker has maintained a close relationship with Nike (NKE)-Free Nike Stock Report. In fact, each of its respective divisions purchased between 39% and 80% of total merchandise from this single vendor. A less healthy company might make this a weakness, depending so highly on its success. But Nike continues to expand its top line at a double-digit clip on a quarterly basis, and its presence in Foot Locker’s international outlets helps support this expansion. The relationship helps FL with both sales expansion and pricing power.
Superior Capital Structure and Asset Management: The company has kept its debt totals in check throughout most of its history. Presently, long-term debt makes up only 5% of its capital structure, and it maintains strong working capital at this time, as well. While these cash assets are unlikely to be applied to the acquisition of other privately held companies, they can be used to progress the company’s strategy to expand in international markets. A history of consistently increasing dividend payouts and shrinking common share totals display management’s willingness to improve shareholder value.
Weaknesses
Declining Foot Traffic: Foot Locker, among other retail outlets, has been experiencing declining foot traffic in its mall-based stores for some time now. This has directly resulted in a series of store closings, which we expect will continue for the foreseeable future. Management noted in its most recent earnings report that it expects to have 40 fewer locations by the end of the calendar year. What’s more, this raises curiosity as to the potential effectiveness of its store remodeling program. In 2014, Foot Locker remodeled roughly 300 locations and its capex budget likely exceeded $200 million. If foot traffic continues to decline in these outlets, we question if that capital could have been better spent elsewhere.
High Employee Turnover: A downfall that plagues many retailers, high employee turnover can weigh heavily on the bottom line. And for a company that consists of over forty thousand employees, many of whom are paid the minimum wage, it can represent a very serious problem. The potential for an increase of the minimum wage could positively impact this situation, but until such comes to fruition, it will remain a factor worth monitoring.
Opportunities
Direct to Customer: To combat the aforementioned losses to poor foot traffic, the company has instituted a direct-to-customer ecommerce platform. Its development represents a strong opportunity, particularly when noting its ties to Nike, who anticipates ecommerce will represent a multi-billion dollar platform in only a few years. Foot Locker has already begun remodeling some of its international locations, turning them into distribution centers to support this initiative. A bevy of Web Sites under its control, including eastbay.com, final-score.com, and flagship titles like footlocker.com and ladyfootlocker.com offer some of the largest selections of sportswear and apparel on the Web.
Fragmented Markets: The fragmented marketplace in which Foot Locker operates can offer it the ability to branch out with smaller companies that do not possess the cost advantages that it does. Developing relationships with new manufacturers and up-and-coming brands can help increase market share and yield long-term benefits. The market, at present, has been lacking material trends that sell to the masses. But the ever-present potential of a breakout product in a fairly diversified apparel business, coupled with the financial leverage that Foot Locker possesses, is a solid pedigree for success.
Threats
Few Identifiable Fashion Trends: The athletic footwear and apparel industry is subject to changing fashion trends and customer preferences. Of late, few discernable trends have presented themselves. And although this has not had a material effect on the top line over the past year, persistence of the trend could result in declining foot traffic and an even greater number of store closings. Industry pundits expect it is only a matter of time until the next largely attractive item hits the market. But until that time, the threat remains real, and Foot Locker will need to leverage its balance sheet to support top-line advances.
High Levels of Competition: Little of the inventory sold at Foot Locker locations is exclusively offered by the company. Much of it is sold in competing athletic footwear and specialty stores, sporting goods stores, department stores, and traditional shoe stores. It is for that reason that reputation, store location, and advertising play such a significant role in the company’s success. What’s more, barriers to entry in the retail industry are relatively low, and the company cannot guarantee that it will compete successfully with its counterparts like Finish Line (FINL) and the privately owned Sports Authority.
Conclusion
All told, we think Foot Locker’s ability to overcome an unpleasant operational environment over the past year speaks volumes about its reputation and the strength of the brand. Its pursuit of direct-to-customer offerings ought to help boost the top line over the long haul, while geographic expansion continues to promote near-term potential. In fact, at this time, its price-to-earnings ratio suggests it is trading at a small discount. Given the presence of a growing dividend payout, and the potential for its relatively young Lady and Kid’s Foot Locker locations, this equity could make a solid addition to many diversified portfolios.
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