Buy, Sell or Hold: Foot Locker Races through the Mall

I remember back to my childhood when I laced up my first brand new red-and-black Air Jordan basketball shoes and made believe I could do the amazing things Michael Jordan could do on the court.

This type of "make believe" and shoe purchase happened almost every summer - but to my dismay as my shoe size increased my basketball skills didn't. My overly generous parents indulged me in this expensive passion for the sake of fitness - and I know for certain that many parents are doing the exact same thing today.

The company where I bought my shoes so many years ago - Foot Locker, Inc. (NYSE: FL) - continues to provide the same high-quality footwear to the same type of customer, as well as a whole new crop of customers/athletes and is delivering fantastic earnings from it.

Foot Locker operates over 3,500 mostly mall-based stores in the United States, Canada, Europe, Australia and New Zealand, and just recently, through an acquisition, it entered Germany and its surrounding countries in Europe.

Primarily the company sells sneakers and sporting goods under the Foot Locker, Champs, Footaction, Lady Foot Locker and Kids Foot Locker banners.

Suffice it to say, if you've been in a mall anywhere in North America you are more than aware of the large footprint that Foot Locker has.

Shareholders are also aware of the company's financial imprint as its delivers a generous 2.2% dividend yield combined with growing earnings per share and increased sales.

Foot Locker Outrunning the Competition

One of the quirks that keeps Foot Locker relevant even in the fickle apparel sector is that it is not tied to any one manufacturer. Of course the company has very strong ties with Nike and its line of shoes, but it also sells a myriad of products from other "cool" manufacturers such as Adidas, Reebok, ASICS, Converse, Timberland and Under Armour. See my recent Buy, Sell or Hold call on fast-growing Under Armour.

The ability to supply the "cool" shoes and apparel makes Foot Locker nearly impervious to changing tastes in fashion trends in the athletic arena. Therefore the competition it faces from factory-owned specialty retailers such as Nike and Under Armour, who are subject to the whims of the customer's perception of being "cool," is mitigated.

The only true competition comes from Finish Line Inc. (Nasdaq: FINL) and Dick's Sporting Goods Inc. (NYSE: DKS), neither of which has shown the recent success of Foot Locker.

Foot Locker is running laps ahead of the competition financially with better earnings per share growth, better operating margins, better same-store sales growth, a better price-to-earnings multiple, and a better dividend yield.

I could break down the numbers for you, but it would be very repetitive as by nearly every metric the story remains the same - Foot Locker is in a better financial position than its peers.

Foot Locker is also steps ahead of the competition with its merchandise. The company has focused on the basketball shoe category with great success.

After all, each basketball shoe comes attached with a big marketing budget behind it - usually financed entirely by the manufacturer. Those who watched last season's NBA finals were witness to the barrage of shoe commercials by some of the biggest marquee names in sports.

However the company is not resting on its basketball laurels - it is now setting its sights on the running shoe category -- where Finish Line has a slight edge.

The one area where it could be said that Foot Locker is lagging behind is in its sales of running shoes - and coupled with that is sales to women. The company realizes that the trend toward healthier lifestyles has translated into more running shoe sales.

However, Lady Foot Locker has not had the appeal of other retailers, and the company is addressing the problem head on. It closed 21 underperforming Lady Foot Locker stores in the first quarter and is showing positive results in newly remodeled stores, where the proper mix of merchandise is on display.

And speaking of remodels, Foot Locker is seeing the most growth out of its Kids Foot Locker division, where it has remodeled a number of its stores to a more kid-friendly environment.

Not only are kids and parents shopping for shoes and apparel at these stores, but they are getting entertained while doing so, with features like the Pro Zone and Hero Size Footprints. Foot Locker expects to have 20% of its Kids Foot Locker stores remodeled by the end of the year.

Expanding Foot Locker's Imprint Abroad

Foot Locker recently completed an acquisition in the beleaguered European economy through the purchase of Runners Point Group. That doesn't sound all that wise, but the case for doing so is quite strong.

Runners Point along with its Sidestep brand are very popular in the strongest country in Europe - Germany. In fact, the Foot Locker stores currently located there may soon be rebranded to carry the prominent Runners Point or Sidestep name.

With this acquisition, Foot Locker added 200 retail stores, which netted a same-store sales increase of 9% in 2012 with $254 million in revenue. All this for the bargain price of $94 million!

Since Foot Locker's debt is negligible, this is a value buy on its part and has the potential for significant returns if and when the European economy revives.

As part of the business decision to purchase Runners Point, Foot Locker suspended its $600 million share repurchase program. But now that the acquisition is complete, the company will resume this sizeable program that helps support the share price.

Foot Locker's Trail Ahead

Foot Locker's share price has been trending sideways for quite some time. The two-year chart below shows it has been bouncing between $31 and $37 for over a year. Why that is? I'm not sure.

What I am sure about is that Foot Locker stands apart from many mall retailers.

It is not subject to the whims of a picky consumer shopping for the latest hot fashion. And it is nearly recession-proof since all growing children need new shoes almost every year, while everyone else will need a replacement shoe sooner or later.

I look for the share price to eventually break out above the current trend and am therefore a BUYER of Foot Locker.

[Editor's Note: If you have a stock you would like to see us analyze in a future issue, leave us a note in the comments below and we'll add it to our list.]

About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.