What a time it’s been for Foot Locker. In the past six months alone, the company’s stock price has increased by a massive 40.4%, reaching $25.55 per share. This performance may have investors wondering how to approach the situation.
Is now the time to buy Foot Locker, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Foot Locker Will Underperform?
We’re happy investors have made money, but we don't have much confidence in Foot Locker. Here are three reasons why there are better opportunities than FL and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales show the change in sales for a retailer's e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Foot Locker’s demand has been shrinking over the last two years as its same-store sales have averaged 1.9% annual declines.
2. Breakeven Operating Margin Raises Questions
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Foot Locker was roughly breakeven when averaging the last two years of quarterly operating profits, one of the worst outcomes in the consumer retail sector. This result isn’t too surprising given its low gross margin as a starting point.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Foot Locker’s $2.83 billion of debt exceeds the $343 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $375 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Foot Locker could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Foot Locker can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of Foot Locker, we’re out. After the recent rally, the stock trades at 19.7× forward P/E (or $25.55 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. Let us point you toward one of our top software and edge computing picks.
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