Investors recently fled Foot Locker Inc. (NYSE:FL). But investing is a distance race, not a sprint, and current valuations are an attractive entry point for longer-term investors.
Foot Locker recently caught my attention when I went looking for consumer-oriented stocks that should fare relatively well from an improving labor market. The company recently released earnings that met expectations, but only because of an additional week in the period. Absent that week, earnings would have fallen short of expectations. This gave many investors sufficient reason to sell the stock and largely stay away. Shares dropped about 6% on the earnings news and have since hovered in the $32 to $33 range.
Foot Locker Inc. (NYSE:FL) is currently priced at a P/E of about 12.7, which is a considerable discount to the industry average of 19.9 and at the lower end of the stock’s own five-year historical range. With such a price tag, the stock seems like a screaming buy. But investors need to be wary. It is easy to get caught in a value trap, where shares of a stock stay relatively low (at what appears to be an attractive valuation) for a prolonged period of time. And, it is tempting to say that is the case with FL shares. It might be, it might not be. I tend to believe that it is not the case here, as I am optimistic on the company’s performance later this year. There are a couple of reasons for this.
First, management stated that it expected the company to hit double-digit earnings growth this year. Favorable earnings could erase from memory the most recent results. And, as Fool John Macris pointed out, the company increased its dividend and also announced a $600 million share repurchase program over the next three years.
Second, I am modestly optimistic on the labor markets. This is a big-picture dynamic that could lead to upside earnings surprises at many retailers. It is tempting to say that hiring this year will follow the same path that we saw last year. Job creation started off 2012 quite strong, but then the pace of growth fell during much of the spring and summer months, before picking back up again at the end of the year (on a seasonally adjusted basis). Although job growth in January and February this year is slower than what we saw last year, I am hopeful that the current pace will be more sustainable. Improvements in the economy are showing up in other areas, and there is potential for these improvements to provide a boost to hiring. For example, the real estate market continues to show signs of modest improvement, and this should have positive spillovers in other sectors, including the labor market. Further, the government reported on Wednesday that retail sales climbed more than many expected in February, suggesting that the spending habits of the American consumer are faring well given changes in taxes and budget issues in Washington. Thus, I anticipate sustained demand for athletic shoes and apparel, which should provide a nice boost to Foot Locker Inc. (NYSE:FL) business.
Not alone
The general macro trend can also benefit another key player, The Finish Line (NASDAQ:FINL). This company sells sport and casual footwear, apparel and accessories through more than 650 stores in 47 states. The Finish Line also seems to be attractively priced, but I’m not ready to invest here yet. Shares of this mall-based retailer have a P/E of 12, which is appealing. The key aspect here, though, is that those numbers are based on trailing 12-month (TTM) earnings that do not take into consideration the most recent quarter. The company is scheduled to release fourth quarter and fiscal-year 2013 earnings on March 28. Those results and related conference call should not only provide insight to the company’s performance but also to the broader industry. Based on current analyst estimates for next year’s earnings, The Finish Line has a forward P/E ratio of 11.4, a bit higher than the 10.5 for Foot Locker Inc. (NYSE:FL). It will be interesting to see how those estimates change following the conference call. I’m not willing to make a bet with this stock one way or another until then.
Caveats
Clearly, there are many risks and reasons to be cautious on the retail area in general and Foot Locker more specifically. One cannot readily dismiss the potential negative impact on the economy of the sequester (or other budget issues that may arise through the year), or the potential for external shocks. Further, the recent upward trend in stock prices has powered the Dow Jones Industrial Average to record highs, with two-thirds of the DJIA components currently overvalued. A broad sell-off could, of course, hit even value stocks.
Foot Locker Inc. (NYSE:FL) shares have essentially been treading water since the earnings-induced sell-off. Based on firm-specific and macro dynamics, I view the current valuation as an attractive entry point for longer-term investors willing to stomach the potential risks.
The article Warming Up To Foot Locker originally appeared on Fool.com and is written by Erik Dellith.
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