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Funding Thesis
Foot Locker, Inc. (NYSE:FL) had a better-than-expected quarter, as each the highest line and backside line beat analyst estimates. The corporate additionally got here out with the optimistic information that it had a stellar Thanksgiving weekend, which resulted in its inventory leaping practically 18% in a single session.
On this article, I do a deep dive at FL’s third quarter earnings report and argue that regardless of some promising developments, it is best to take your cash off the desk in the case of this retailer.
A Snapshot of Q3 Efficiency
All issues thought-about, Foot Locker, in my view, had a 3rd quarter that was largely optimistic. Whereas revenues of $1.99 billion had been down 8.6% Y/Y, they beat analyst estimates by $30 million. Diluted EPS got here in at $0.30, down roughly 70% Y/Y, but beating analyst estimates by $0.08.
Administration introduced that the corporate witnessed robust gross sales in the course of the Thanksgiving weekend, which enabled them to spice up their FY23 income steering, with gross sales now anticipated to be down between 8 and eight.5%, versus being down between 8 and 9%. FY23 non-GAAP EPS, although, was narrowed additional and is now anticipated to come back in between $1.30 and $1.40, versus between $1.30 and $1.50.
Entry into India a Good Transfer however Comes With Query Marks
One of many main bulletins made in the course of the FL’s third quarter earnings name was that the corporate was getting into the Indian markets in 2024, through licensed partnerships. On the brick-and-mortar finish, the corporate might be partnering with Metro Manufacturers Restricted. Nykaa Vogue, however, would be the firm’s companion for e-commerce.
The sneaker market in India has been steadily rising, and is anticipated to develop at a good tempo. According to Statista, the Sneakers section is anticipated to generate $2.63 billion in income in 2023, and is then anticipated to develop, at a CAGR of 6.18%, to $3.55 billion in 2028. Subsequently, FL’s resolution to enter the Indian markets is the fitting one, in my view, because the market may very well be a powerful progress lever for the corporate within the coming years. Moreover, Metro Manufacturers and Nykaa Vogue are robust native retailers, with the former operating more than 700 stores across the country, and the latter a powerful cosmetics-to-fashion e-commerce platform.
Whereas there are positives to take from the corporate’s resolution to enter into one of many quickly rising sneaker markets, a number of challenges await for FL. First, the competitors is heating up in India. For example, earlier this yr, FL’s future rival, Bata India, which has manufacturers comparable to Hush Puppies and Scholl, was in partnership talks with Adidas that would outcome within the German shoemaker being a wholesale companion of Bata. This might spell unhealthy information for FL if the deal involves fruition.
Furthermore, in response to Statista, the Indian shopper is looking out for distinctive designs that mix conventional Indian components with fashionable traits, which means that Foot Locker must first forge partnerships with local brands such as 7-10 and The Saree Sneakers, even earlier than making their entry into the Indian market.
All issues thought-about, the transfer into India ought to profit FL in the long term, though this technique shouldn’t be with out query marks.
NBA Deal Provides a New Avenue of Development For Its Loyalty Program
The opposite main takeaway from FL’s third quarter was the corporate’s partnership with the NBA, by way of which, FL would change into “an official league advertising companion within the US.” This can be a nice alternative for FL, because it permits it to market to the NBA’s 84 million followers on Instagram, thereby offering a brand new channel to amass prospects. The settlement may also enable FL to capitalize on key occasions such because the NBA All-Star Recreation to amass prospects and probably develop revenues.
Moreover, the cope with the NBA provides the corporate, a chance to develop its loyalty FLX program, which is likely one of the key pillars of the corporate’s Lace Up technique. The corporate, in the course of the third quarter, noticed the loyalty program account for 23% of the gross sales, a marginal uptick Y/Y. FL has set itself a goal of fifty% of gross sales coming from the loyalty program by 2026. By providing further advantages by way of its loyalty program, on account of the cope with the NBA, will enable the corporate to make important progress in the direction of attaining the goal.
FL has had a 25-year relationship with the NBA. And its key companion Nike is likely one of the largest model companions of the league, which gave FL an oblique publicity. By this new deal, the corporate stands to realize extra direct publicity to the league, and it now has a brand new avenue for progress for its loyalty program.
Inventories Proceed to be a Concern
Regardless of some optimistic strikes made by the corporate, there have been additionally points that buyers want to fret about. And the key challenge proper now, in my view, is the stock scenario. Whereas the steering for This fall means that total inventories for FY23 could be flat to down Y/Y, within the quarter passed by, inventories had been nonetheless up 10.5% Y/Y albeit down barely in comparison with Q2.
Moreover, administration, in the course of the earnings name, additionally talked about that they’re prone to depend on promotions in the course of the vacation season, to deliver down inventories. This can be a real concern, particularly since FL’s opponents have largely sorted their stock points out and are bringing new merchandise on their cabinets. Having to depend on outdated merchandise, particularly in the course of the vacation season, might have an hostile influence on the corporate’s high and backside strains within the coming months.
Moreover, as I discussed earlier, the entry into Indian markets would most probably require FL to companion with native sneaker manufacturers. I’m not positive how the corporate would be capable to maintain new partnerships whereas on the similar time trying to filter out its present stock.
Valuation
|
Ahead P/E A number of Strategy |
|
|
Value Goal |
$17.00 |
|
Projected Ahead P/E a number of |
12.2x |
|
Projected FY23 EPS |
$1.35 |
|
Projected Earnings Development Price |
4% |
|
Projected FY24 EPS |
$1.40 |
Sources: Refinitiv, FL’s Q3 Earnings Report, and Creator’s Calculations
The corporate, as I discussed earlier, now sees FY23 EPS coming in between $1.30 and $1.40. I’ve assumed the midpoint of the corporate’s steering for my calculations, which might be $1.35.
The corporate, in response to Refinitiv, is at present buying and selling at a ahead P/E of 14.3x. Traditionally, the corporate’s 10-year median P/E a number of has been 11x, which contributes to my view that the corporate is overvalued at present ranges. Nevertheless, on condition that there are some potential progress levers for FL, such because the cope with the NBA, I am forecasting a barely increased a number of of 12.2x, which is by the way the 15-year historic median P/E a number of of FL.
In keeping with Refinitiv, the corporate’s earnings usually are not anticipated to develop within the subsequent twelve months. Nevertheless, beneath the idea that the cope with NBA and the entry into Indian markets goes easily, I’ve assumed an FY24 EPS of $1.40, which is the upper finish of the corporate’s present steering and implies a barely optimistic 4% earnings progress.
A ahead P/E of 12.2x and an FY24 EPS of $1.40 would lead to a value goal of $17, which suggests a 37% draw back from present ranges.
Upside Dangers
The primary threat issue to my thesis could be that the cope with the NBA goes higher than anticipated and that the long run earnings are available significantly better than anticipated.
Moreover, there may be additionally the chance that the corporate has a bumper vacation season, which might enable it to clear its inventories sooner, thereby enabling it to promote extra full-price objects than anticipated.
Concluding Ideas
FL had a better-than-expected third quarter. And the inventory had each proper to leap practically 18% put up the outcomes, particularly because the firm had a stable Thanksgiving weekend. The partnership with the NBA in addition to the corporate’s deliberate entry into India are all robust catalysts for the long run.
Nevertheless, in the mean time, points proceed to plague the corporate. Inventories stay elevated and the corporate expects to proceed to depend on promotional exercise for the foreseeable future. Even its potential entry into India is fraught with dangers, particularly on condition that the Indian shopper prefers native sneaker manufacturers, in comparison with FL’s present companions.
Lastly, from a valuation standpoint, the inventory does look like considerably overvalued. The post-earnings pop within the inventory was definitely nice. Now although, in my view, it is time for shareholders to money in on this retailer whose struggles are removed from over.
Editor’s Observe: This text discusses a number of securities that don’t commerce on a serious U.S. alternate. Please concentrate on the dangers related to these shares.