The Intrinsic Value Of Foot Locker


Photographer: Michael Nagle/Bloomberg

Foot Locker (FL) has experienced strong price growth in the stock market for the past decade, trading as high as $78 in May 2017. But, in the wake of Amazons rising power, a whole army of retail stocks have been crushed during the past year dragging Foot Locker down to attractive price levels. An announced deal in June 2017 between Nike and Amazon added further pressure on Foot Locker’s price.  Despite all these headwinds, the company’s current price of $36 per share, potentially offers value investors an entry point.


The Business

Foot Locker is a leading retailer of sports shoes and athletic apparel. The company focuses on high-end athletic footwear and includes all the key brands in its product line. It operates 3,363 stores in 23 countries located in North America, Europe, Australia and New Zealand. Nike is by far the most important brand sold by Foot Locker accounting for 68% of all sales last year. FL also organizes many events featuring famous sports stars or special product launch activities.

The Intrinsic Value of Foot Locker

To determine the value of the stock, lets start by looking at the companys history of free cash flow. The free cash flow is significant because it represents the companys ability to retain earnings and grow the business. Most importantly, it demonstrates a return on the principal that might be reinvested back into the business. Below is a chart of Foot Locker’s free cash flow over the past ten years.


Preston Pysh

Foot Locker free Cash Flow

As one can see, the results in the past ten years have been reasonable. When looking to the potential for the company to make future free cash flow, conservative estimates are used. To build this estimate, an array of potential outcomes are averaged based on the magnitude of their corresponding probabilities.


Preston Pysh

Foot Locker free Cash Flow Future

Assuming there is a 10% chance for the upper growth rate of 3% per year, a 50% chance for zero growth and a 40% chance for the worst-case scenario of -7% annual growth, a cumulative free cash flow projection was produced.

Assuming these growth rates and probabilities are accurate, Foot Locker could potentially produce an 8.9% annual return at the current price of $36. Now, lets discuss how and why those free cash flows could be achieved.


The Competitive Advantage of Foot Locker

Considering that the net profit margins have been between 6-8% during the last 5 years (which is high for a retailer), it is clear that Foot Locker must possess several unique advantages, which should enable it to remain competitive into the future:

Quality/branding. Both Foot Locker itself is well-known and trusted name and also the brands it sells are the who-is-who of the athletic footwear and apparel segment: Nike, Adidas, Jordans, Puma, Reebok, Under Armour and much more. Due to its long-term relationship with these companies, Foot Locker has access to the newest models. Pricing power. Due to its large size and well-established connections, Foot Locker has leverage with suppliers, which allows it to get special deals and offer competitively priced apparel. Financial strength. Cash & short-term investments alone are equal to its total liabilities. With a current ratio above 5 and a quick ratio of 2, the company has a very strong balance sheet. Add high margins and historically very strong free cash flow rates, and the financials look great. Stickiness. Foot Lockers vast presence enables it to provide a unique experience to the customers. While Amazon and other online sellers can be dangerous competitors for low-end products, the high-end segment requires a personal element. When a T-shirt is $20 or a pair of Sneakers cost $50, customers will likely buy online but before investing $220 in the new Nike Kobe 11 Elite Low QS 4B, most customers prefer to buy in a physical store. The impact of the Nike-Amazon deal seems, therefore, to be limited to the lower end products and might provide a layer of protection for Foot Locker.


Regardless of the positive attributes listed above, Foot Locker will struggle to retain market share. The retail sector is becoming extremely competitive and its unknown how much revenue will be lost in the coming years. As a result of this concern, the intrinsic model accounted for a decreasing cash flow moving forward.

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