On Friday, shares of Foot Locker (NYSE: FL) surged over 9% as the specialty retailer reported better than expected earnings. Revenue increased for the quarter 5% and same store sales were also up 5%. With this good news, does this make Foot Locker attractive enough to buy? Or are investors getting this stock wrong? Let’s look at the company in depth and see whether or not it is worth your investment dollars.
Foot Locker Background
Foot Locker began back in 1974 as a specialty store spin-off of Woolworths. If you are unfamiliar with Woolworths, they are the creator of the five and dime stores that were so prevalent in the early 1900’s. In 1963 the company entered the shoe business by purchasing Kinney Shoe Corporation and 9 years later, Foot Locker was born.
Sales grew steadily over the years and by the 1990’s when Woolworth store sales were in decline, Foot Locker was there to account for the majority of revenue. Because of this, Woolworths poured money into the brand, buying rivals and cementing its place in the specialty shoe niche.
Today, Foot Locker operates 3,363 stores in 23 countries. They also run Lady Foot Locker and Kids Foot Locker stores in addition to Champs Sports, House of Hoops, Footaction USA and Eastbay.
The Economics of Foot Locker
Foot Locker is an interesting retail play. Many retailers are struggling, thanks in large part to the growth of ecommerce. With falling foot traffic in malls, Foot Locker is going to have to work hard to keep sales growing.
When the company released quarterly earnings on Friday, they “are planning for a mid-single digit comparable sales gain and a double-digit earnings per share increase for the full year of 2017,” per Lauren Peters, executive vice president and CFO.
However this estimate comes at the same time they acknowledge that mall traffic is expected to be down in the beginning of 2017.
Of course, there is online sales which isn’t affected by mall foot traffic. Online sales for the retailer continue to grow, rising 20% year over year in 2016. Estimates are that online sales will continue to rise in fiscal year 2017.
As for capital improvements, in 2016 the company closed 51 stores and has plans to close another 100 stores in 2017. They are also in the middle of remodeling many of their remaining stores and improving the technology and logistics behind their online ventures.
All this leads to investors seeing good future prospects for Foot Locker. The question is, should you get in now?
Is Foot Locker A Buy?
Foot Locker has a strong grasp on the athletic sneaker and apparel market. However, more and more consumers are turning away from traditional shopping malls and buying more and more online. As such, Foot Locker is going to have to make a plan and execute a web strategy if they want to remain a leader in this field.
They cannot just sit back and think that consumers will continue to buy shoes in person. Other retailers thought the same thing about clothing and yet, clothing brick-and-mortar store sales fall as online sales surge.
The good news is that they have a plan. They are slowly closing underperforming stores and shifting the focus to make both online and in store shopping a more fun experience for shoppers.
In addition to this, there is a shift in the sneaker market. The trend now is for sneakers and casual shoes to be a staple fashion accessory that completes a look. As this trend continues, you can expect Foot Locker to continue to drive sales.
With all this said, I am cautiously optimistic on Foot Locker. They are well known and have a solid strategy for growth. But the soft guidance they issued for the first quarter has me a little spooked. I would wait to see how that plays out before buying a position in this stock. If you can’t wait however, I would make certain to have an exit strategy should the wheels come off when first quarter earnings are released.
This author has no positions in any stock mentioned and does not plan to open any positions in any stocks mentioned for at least 72 hours after publication of this article.