2023-10-04 14:57:36 ET
Summary
- Foot Locker's popularity has declined due to the rise of the secondary shoe market and online customization options.
- Online competitors like Stockx and Nike's websites have far more web traffic than Foot Locker.
- Foot Locker's financial data shows inconsistent income and negative growth, making it a risky investment.
- Hi I'm Pink Sands Value Investor and I am focused on finding Deep Value Opportunities.
I remember when Foot Locker ( FL ) had the best shoes. The latest Nikes, Jordans, and Reeboks adorned their walls. I would feel lucky if I got the right color and size shoe I wanted, especially in popular models. Having a friend who worked at Foot Locker and could get you discounts and inform you when new shoes came in was crucial. At its peak, there would be lines outside the store in malls across the USA for certain product releases. Maybe I’m old but it appears those days are gone.
The secondary market of shoe sellers on Stockx and other locations changed the game. Now you can instantly design and create your own shoes or use your own custom colors on already famous shoe models.
When I happen to be in a mall, I still stop by Foot Locker but I am always disappointed. I feel I go more for nostalgia than because I believe I will find a shoe I like. On the rare occasion that I find a shoe I like, I never can find my size, and I wear a size 12.
Once you know your size in a given brand, ordering online is just better because you get better selection, better pricing and better convenience. No amount of exclusive shoe drops or shifts into apparel sales can change this and save Foot Locker in my opinion. It’s a dying brand in a dying business model typically located in a dying mall.
When I recently took my kids to the store looking for some signature shoes, they didn’t have anything my kids wanted. The selection at DICK's Sporting Goods (DKS) is often better and the selection online is unlimited. According to my children, “no one buys shoes at Foot Locker because they never have good shoes.” For these reasons and the reasons I outline below, I consider Foot Locker a strong sell.
This anecdotal evidence doesn’t necessarily matter so let’s take at the company’s recent financial data and see if the numbers support my assumption that Foot Locker is a strong sell.
The five-year chart shows that Foot Locker has at best become a trading stock where buying low and selling high might provide some profits and at worst has become a value trap.
Online Traffic
Web traffic for Foot Locker was over 17 million visits last month, but Stockx had twice the number of visitors at over 34 million and Nike (NKE) had about nine times as many visitors with over 150 million. You can read more about Foot Locker's web traffic here but I include this information to show how online competitors are crushing Foot Locker right now. Whereas Nike used to be Foot Locker’s best business partner, nowadays Nike benefits more by partnering with other companies or simply by selling the product themselves and eliminating the middleman.
Income and Valuation
Operating income has remained positive because of the high margin business but income has not been consistent and growth appears to have shifted into negative territory.
Seeking Alpha
If these growth numbers don’t turn around quickly then Foot Locker will be just like a melting piece of ice getting smaller and smaller as time goes by and eventually just being a name.
If Foot Locker somehow returns to a 5% growth rate moving forward, we could get a fair value approaching the current price. This does not seem very likely.
However, a more likely scenario is continued negative growth over the short term. If we look at the last three years of negative 7% growth and estimate growth staying at around negative 5% we get a fair value that is about half current value. In my opinion, the last three years is probably more indicative of Foot Locker's future growth than the previous decade. I personally believe that the stock’s current fair value is somewhere between these two values and much closer to $10 than $18 which makes the current stock price severely overvalued.
The Dividend
Current earnings are not supporting the current dividend and the dividend growth is definitely not matching the earnings growth which I believe puts the dividend in danger of being unsustainable.
How Foot Locker Might Return to Growth
To turn their business around, Foot Locker should embark on a comprehensive strategy that aligns with the evolving retail landscape. A significant focus should be placed on strengthening their e-commerce capabilities, ensuring a seamless online shopping experience through a user-friendly website and mobile app. The implementation of an omnichannel approach, which bridges the gap between physical stores and online shopping, is paramount. This includes features such as buy online, pick up in-store (BOPIS) and the option to ship from physical store locations. Moreover, personalization should play a central role by leveraging data insights to offer tailored recommendations and loyalty rewards.
Collaborations with popular brands and athletes can create buzz and exclusivity. Foot Locker should also consider innovative store concepts that provide immersive and experiential shopping experiences. Sustainability initiatives, diversified product categories, and enhanced customer engagement are additional facets of this transformation. By optimizing the supply chain, reducing operating costs, and evaluating store performance, Foot Locker can navigate the path to a brighter future. To bolster its brand image, it should invest in marketing campaigns, strengthen data security, and establish a feedback loop with customers. Finally, embracing emerging technologies like AR and VR can elevate both online and in-store experiences, helping Foot Locker remain competitive and relevant in the ever-changing retail landscape.
The truth is that Foot Locker has already tried many of these strategies, but they have not had much progress. New competition and competition from former partners makes it difficult to see how Foot Locker can stay relevant and competitive. It is difficult for me to fathom how Foot Locker can return to its former glory because brick and mortar stores just are not what they used to be and other competitors are pivoting to online sales better than Foot Locker.
Final Thoughts
Foot Locker faces significant challenges in a rapidly evolving retail landscape, as evident from both anecdotal evidence and financial data. The days of Foot Locker as the go-to destination for the latest and greatest shoes seem to be fading, with online competitors and shifting consumer preferences taking center stage. While the company has attempted various strategies, the road to recovery appears arduous and the dividend could be at risk.
To potentially regain its footing, Foot Locker must continue a comprehensive transformation. Strengthening its e-commerce capabilities, implementing an omnichannel approach, and prioritizing personalization are essential steps. Collaborations, innovative store concepts, sustainability efforts, and a focus on customer engagement should also be part of the strategy. Optimizing the supply chain and controlling operating costs are critical for financial health.
The formidable competition and the changing dynamics of the retail industry make this a tall task indeed. While these strategies could help, it's uncertain whether Foot Locker can fully return to its former glory. The stock's valuation also appears to be disconnected from its current challenges. In essence, Foot Locker's future hinges on its ability to adapt swiftly to the digital era and carve out a distinct and relevant place in the modern retail landscape. I personally do not see Foot Locker making enough progress towards this goal and rate it a strong sell. I think you would have better opportunities for profits buying and selling shoes on stock x than investing in Foot Locker. As always, please do your own due diligence before buying any stock positions and good luck investing.
For further details see:
Foot Locker: Negative Growth Puts Dividend And Stock Price In Danger