Foot Locker (FL) Forecasts a Third Consecutive Year of Growth in 2012

At the end of last week, shares of apparel and footwear retailer Foot Locker (FL: Charts, News) were tugged in both directions by bulls and bears despite soundly beating on both earnings and revenue. The company, which has increased its profit and revenue for two consecutive years, also sees a third year of unfettered growth.

Foot Locker sees strong demand for new athletic gear from major brands, such as Nike (NKE: Charts, News), Adidas (ADDYY: Charts, News) and Under Armour (UA: Charts, News), in 2012. The European Football Championship and Olympic Games in the coming year are also anticipated to generate strong demand for its shoes and apparel, offsetting macro concerns in the region.

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The company posted fourth quarter earnings of 53 cents per share, or $81 million, on revenue of $1.5 billion. This was a 47% increase in profit on a 7.9% rise in revenue, which beat the analyst consensus of 51 cents per share on revenue of $1.49 billion. Excluding one-time charges, earnings actually came in at 55 cents - a gain of 53% over the prior year. The company also received a 10 cent benefit in the fourth quarter due to an extra week this year, without which profit increased 42%. CFO Lauren Peters stated that Foot Locker's growth model for 2012 was not dependent on this benefit. Excluding foreign exchange fluctuations, revenue came in at $1.5 billion - an 8.2% gain.

Company-wide same-store sales of 7.5% were stronger than the 7.3% posted last year, but failed to impress many investors, who expected more robust numbers. Same-store sales grew evenly across all global regions except for Europe, which still managed to post a "slightly positive" gain. In Europe, high unemployment, a shaky currency and a weak economy will continue to be strong headwinds in 2012.

The company has kept its inventory lean, at 0.9%, or $1.07 billion, an encouraging sign. In the past, overweight inventories have sunk some of the brightest names in footwear, such as Crocs CROX and Deckers (DECK: Charts, News). Merchandise margins increased, due to cleaner inventories and fewer markdowns. Lady Foot Locker, its store for women, remains the company laggard with flat same-store sales, which the company hopes to "turn around" in 2012.

Analysts believe that Foot Locker stands to grow its earnings by 12% to 16% in fiscal 2012, despite a weak start in Europe, where the company was forced to close several stores. The company attributed bad weather in parts of Europe exacerbating the ongoing macro problems. The company is also testing new store formats in its Champs and Foot Locker stores. In the United Kingdom, Foot Locker opened its first "locker room" store, which is more focused on sports performance than fashion appeal.

To continue its strategic growth, Foot Locker plans to open 82 new stores while closing 75 non-performing ones. Analysts believe that Foot Locker, being a consumer cyclical stock, is in the middle of a positive feedback loop in athletic footwear, which historically has lasted between three to five years. New styles, colors and materials in athletic footwear, as well as a greater variety of non-athletic shoes, have made one-stop retailers such as Foot Locker attractive to consumers. The company's premium offerings from Nike, such as the $180 Air Jordan XI Concord and the $220 Foamposite Galaxy shoes have generated massive consumer interest, despite their high price tags. However, investors should keep a close eye on rising gas prices, which is likely to dampen appetite for high-priced athletic shoes.

Shares of Foot Locker trade at 12.5 times forward earnings with a 5-year PEG ratio of 0.89, signaling undervalued shares with strong long-term growth potential. Although this stock won't take off anytime soon, it pays a decent 2.5% dividend.

Other News About FL
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Published on Mar 6, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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