Investors throw shares of Foot locker ( FL 0.07% ) on the clearance rack. Foot Locker shares fell sharply on a disappointing outlook for its earnings call (the company expects sales to fall 4% to 6% in 2022), growing concerns that the direct business (DTC) Nike cuts out the middleman, and a slew of analyst downgrades and are now down more than 50% from their 52-week high.
Why the pain?
In its latest earnings call, Foot Locker revealed that it would diversify its product line so that no one supplier accounts for more than 55% of its spend as a supplier. Historically, Nike made up an overwhelming percentage of Foot Locker’s inventory, which has been good for Foot Locker since Nike has incredible brand strength and has been in demand for years. For example, in 2020, Nike accounted for around 75% of Foot Locker’s inventory.
Judging by the downgrades and the price drop after the call, it looks like analysts and investors don’t like the move. There are also concerns that the growth of Nike’s direct-to-consumer online business could reduce Foot Locker’s role as a Nike partner.
However, 55% is still a relatively large amount of purchases to spend on a single supplier, so it’s not like Nike is going away. Nike has cut many suppliers over the past few years, ranging from Zappos to Urban outfittersand even took off his sneakers from Amazon.
But Nike has stuck with Foot Locker, indicating that the company still sees some value in it as a partner. Also, it doesn’t seem like a bad idea to branch out and not be too dependent on one supplier. This may be an opportunity for Foot Locker to increase its business with other brands. Non-Nike sales increased 30% in the quarter, and apparel and accessories sales also increased 30%.
On the call, the CEO of Foot Locker highlighted sales growth with companies like adidasCougar and even Crocodilemaybe showing the way forward, so maybe the way forward is starting to materialize.
Significant returns for shareholders
Foot Locker is accelerating its return to shareholders. The company increased its dividend by 33% to $0.40 per share, giving it a forward yield of more than 5%. This is an attractive payout for income investors and a level of return typically seen only in the telecommunications or utilities sector. It’s an old investment adage that the safest dividend is the one that’s just been increased.
In addition to the dividend increase, Foot Locker’s board also authorized a new share buyback program that will allow the company to repurchase up to $1.2 billion in stock. Foot Locker’s market capitalization is only $4.2 billion, so that would be an incredible 28% of the company’s outstanding shares.
Share buybacks are another way to return capital to shareholders, as they reduce the number of shares in the company and increase earnings per share. Even better, reducing the number of shares increases the proportion of the company you own as a shareholder and increases the value of the remaining shares. Additionally, they can be a signal that management believes the stock is undervalued.
After the recent sale, Foot Locker looks ridiculously cheap on almost every valuation metric. Foot Locker now trades at a price/earnings multiple of just over 3, which is incredibly cheap and a big discount to the S&P500 in its entirety. Foot Locker even looks cheap on this basis compared to its peers in the retail space like Kohls Where Dick Sporting Goodsboth of which trade at price-to-earnings multiples of greater than 8. The shares also trade at a price-to-sell ratio of less than 0.5 times sales.
Foot Locker is also priced below its book value of $32 per share. Book value is essentially the value of the business if it were liquidated, so Foot Locker is valued even below that low bar.
The company also has $9 in cash per share on its balance sheet and very little long-term debt, which further adds to the value proposition here.
Is Foot Locker a purchase?
While the company will indeed have to navigate through diversifying its product and supplier mix, and the conference call results were disappointing, shares are now very cheap for what still looks like a healthy and healthy business. stable. Between this valuation, the increased dividend payout and the massive share buyback program, I’m willing to call Foot Locker a buy here, hold it and enjoy shareholder returns while the company reiterates its strategy and chart the best course forward.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.