Foot Locker (FL)

The shares of this athletic shoe retailer were just upgraded to “overweight” by Barclay’s. The company beat its earnings estimates by nine cents in the last quarter.

Foot Locker (FL)

from Dow Theory Forecast

Several trends have given Foot Locker (FL), the athletic-shoe retailer a leg up:

Basketball shoes have enjoyed strong and consistent demand, with sales rising at double-digit rates in each of the last three years and maintaining the pace when other segments of the market stumbled. Foot Locker commands about 45% of the U.S. market for basketball shoes.

Sneakers and workout clothes have become the default casual outfit for more and more Americans. This “athleisure” trend has broadened the market for Foot Locker’s products.

Technical and design innovations by Foot Locker suppliers such as Nike (NKE) and Under Armour (UA) have allowed the retailer to maintain high price points on new models.

Per-share profits rose 22% in the January quarter and 25% in the year ended January, topping analyst expectations. Despite continued strong growth potential, the stock, a Focus List Buy and Long-Term Buy, is far from expensive. At 17 times expected year-ahead earnings, Foot Locker trades at a 28% discount to the average apparel retailer in the S&P 1500 Index.

In the January quarter, Foot Locker grew sales 7%, with same-store sales up 10.2%, its 20th consecutive quarter with same-store growth. For the year, Foot Locker opened a net 50 new stores and relocated or remodeled 319 others. Operating profit margins reached a record 13.3% last year, up from 12.3% a year earlier and continuing a five-year trend.

Foot Locker’s overseas expansion (it generated nearly one-third of its revenue outside the U.S. last year) has dovetailed with basketball’s rising global popularity. Stars like Kobe Bryant, LeBron James, and Kevin Durant enjoy huge name recognition overseas, and their shoe lines have helped drive growth at Foot Locker.

Of course, basketball’s above-the rim growth won’t last forever. For the year, 39% of retailers surveyed last month by CitiResearch expect basketball-shoe sales to rise, with 32% projecting flat sales. However, with apparel and women’s footwear on the rebound and an aggressive program of store remodeling boosting sales productivity, we remain confident in Foot Locker’s growth potential.

The consensus projects growth of 3% for sales and 10% for per-share profits in fiscal 2016 ending January, followed by fiscal 2017 gains of 5% and 11%, respectively. These manageable targets assume a slowdown in basketball growth, and in our view leave room for upside.

Over the last three years, Foot Locker grew both operating cash flow and free cash flow at an annualized rate of 11%. The company has historically made a habit of sharing its cash with stockholders. Foot Locker raised its dividend at least 10% in each of the last five years, including a 14% increase last month. Aggressive buybacks have reduced the share count by 8% over the last five years, and the company launched a new $1 billion repurchase program in February.

Richard J Moroney, CFA, Dow Theory Forecasts, www.dowtheory.com, 800-233-5922, March 16, 2015