Shares of Foot Locker Look Unbelievably Cheap

As a retailer, Foot Locker (FL) is getting hit from all angles right now, whether its supply chain issues making it hard to get merchandise in the door, or labor challenges making it more difficult to staff its stores.

Foot Locker easily beat earnings and revenue expectations on its third-quarter earnings call. Still, shares fell after the CEO warned that supply chain issues would persist into the holiday season, which is historically a vital time for the company.

While these challenges are real, the market is pricing shares of Foot Locker like it’s left for dead, but that is far from the case. Given the rock-bottom valuation and the fact that these headwinds are mainly temporary and not company-specific, even if they take a while to resolve, I am bullish on Foot Locker. (See Analysts’ Top Stocks on TipRanks)

Valuation

In an uncertain market environment where there is volatility surrounding the Omicron variant and fear about inflation, there is a lot of talk about the multiples of richly-valued stocks contracting. However, it is hard to find something more inexpensive than Foot Locker when looking for a margin of safety.

Shares of Foot Locker are currently trading at a P/E of around 5x, which is unbelievably cheap in today’s environment. Furthermore, shares are trading at around 6x consensus earnings for next year. Looking at the stock on a price-to-sale basis, Foot Locker is trading at a P/S multiple of less than 1x. 

Obviously, this is not an apples-to-apples comparison because Foot Locker is a retailer and Nike is a manufacturer, but let’s take a look at Foot Locker versus Nike (NKE), from which Foot Locker gets much of its inventory. Nike trades at a P/E of about 43x, a forward P/E of almost 34x, and a price to sales ratio of over 5.

Even comparing Foot Locker to another retailer like Dick’s Sporting Goods (DKS) shows how cheap Foot Locker is – Dick’s is trading at a P/E of almost 9x and a forward P/E of over 10x. Obviously, the product mix is slightly different, but this illustrates that Foot Locker is trading at multiples that are rare to see in this market.  

Jefferies recently launched coverage of the ‘specialty retail’ sector and resumed coverage of Foot Locker with a Buy rating, calling it one of its best buys in the space. Jefferies also noted that for the space as a whole, specialty apparel was trading at an average P/E of 11x, compared to a historical P/E of 13x.

Foot Locker is valued much lower than this average multiple. Jefferies also pointed out the positive outlook for footwear, stating that the global footwear market is projected to grow at 7% a year by 2025, which is a nice setup for Foot Locker. 

Capital Allocation

Shares of Foot Locker currently yield 2.6%. The company raised this dividend 50% in August 2021, and as the old investing adage says, the safest dividend is the one that was just raised.

The company recently used $1.1 billion to buy two companies, WSS and atmos, which has probably limited its ability to buy back shares for the time being. Otherwise, I would like to see the company buying back shares at these depressed levels.

Nonetheless, if the acquisitions prove to be accretive over time, this could add to Foot Locker’s free cash flow and its ability to repurchase shares or raise the dividend in the future. 

The acquisitions look interesting. The acquisition of atmos brings Hedemi Hommyo to Foot Locker, who is considered to be very influential in streetwear and sneaker culture. The deal also gives Foot Locker a presence in the lucrative Asia Pacific market, which it previously lacked. 

The acquisition of WSS gives Foot Locker more off-mall exposure, with 93 off-mall locations located primarily in California, as well as Nevada, Arizona, and Texas. Foot Locker felt it was underpenetrated on the West Coast, and this move can help it get a jump start.

Lastly, Foot Locker invested $100 million in online sneaker resale marketplace GOAT in 2019. That stake is now worth $728 million as of GOAT’s last fundraising round, which valued the company at $3.7 billion. 

Wall Street’s Take

Turning to Wall Street, Foot Locker has a Moderate Buy consensus rating, based on seven Buys, eight Holds, and one Sell assigned in the past three months. The average Foot Locker price target of $64.38 implies 44.2% upside potential.

Analyst price targets range from a low of $45 per share to a high of $80 per share.

Takeaway 

Clearly, with the acquisitions and investments, Foot Locker has a lot of irons in the fire that don’t immediately meet the eye. If it can successfully integrate these acquisitions and monetize its investment in GOAT, then this is another reason shares look way too cheap at these levels.

A P/E multiple around 5 is exceedingly rare in today’s market, especially for a company performing well like Foot Locker. In the meantime, the company is paying a decent dividend and continuing to execute. For these reasons, I am bullish on shares of Foot Locker at current levels.

Disclosure: At the time of publication, Michael Byrne did not have a position in any of the securities mentioned in this article.