Foot Locker Continues Upward, Expects Even More Success
After a terrible 6 month run in 2017, which saw their stock lose more than half its value, Foot Locker has picked themselves off the floor and are now eyeing making it all the way back.
May 2017 to November 2017 will not be remembered very fondly by athletic footwear retailer Foot Locker or its shareholders. This was during a time where there was some concern that online retailing, particularly from behemoth Amazon, may cut pretty deeply into physical retail outlet sales in general, including Foot Locker.
This was also a time where Nike, Foot Locker’s anchor supplier, experienced a rare fashion miss, and while we wouldn’t think that this should matter all that much, as after all, one sneaker isn’t really that much different from another, Foot Locker’s particular clientele is very fashion conscious, and this did end up bearing on the company’s results.
These things together probably should not have unleashed a storm as big as it did though on Foot Locker’s stock, a fall which can only be described as a crash. They went from over $77 at the start of May, and by the time November came around, they were trading below $30 a share.
These events may have been somewhat noteworthy, but nowhere near the magnitude that we would expect would precipitate this company losing over 60% of its value in 6 months. This was not a time where the stock market was crashing or even going down, and in fact, over this time the S&P 500 gained 8%.
Perhaps this stock had been a little too hot over the last 4 years, when they climbed from this $30 area up to the high 70’s. The market went up pretty nicely over this time as well, growing by about a third, and Foot Locker’s growth was several times that, but this is a pretty volatile stock so that’s not entirely unreasonable.
There’s little doubt that perceptions of this stock being overbought factored into this, where investors are seen to have bid a stock up to a level that some may feel uncomfortable, and we often see a pullback after this happens. Once things start to go down in this scenario, more fair-weather investors take their profits as to not lose too much back, which in this case looks like a wise move indeed, but that just adds to the downward momentum.
The gains of these 4 very good years were given back in a very short period of time, not just some of the gains but all of it. Foot Locker may have been overvalued at $77 back then, and its gain of $48 a share may have been a little steep, but this doesn’t mean that the entire move up wasn’t valid, but that was the verdict that was rendered.
Foot Locker Begins the Long Journey Back
When Foot Locker stock bounced off of $30, this did set up a simply fabulous opportunity to buy it. Perhaps the run up was overdone, but the rundown certainly was, by any account. This is exactly what you are looking for in a play like this, especially when you bounce off of the support that kept it from going lower way back before all of this started.
It’s been a year and a half since the wild selling stopped, and while Foot Locker has had its ups and downs since then, it’s been more up than down. We’re now most of the way back, with the stock currently trading at $63.70, more than doubling up since the crash ended.
This did serve as a wake-up call of sorts for the company, which forced them to become more in touch with their clientele and what motivates them. The company’s core clientele are young men aged 16-22, which is a pretty narrow demographic, but one that Foot Locker is more committed to taking advantage of these days.
Foot Locker Looks to Appeal More to Young Men, Their Biggest Clients
Company CEO Dick Johnson recently shared the company’s new vision, which is very conscious of where most of their business comes from. The company’s main aim these days is to “inspire and empower youth culture,” as Johnson puts it. This is taking them from simply setting up stores in malls and putting their shoes on display for sale to moving to a more culture-centered experience aimed directly at these young men who buy their merchandise.
Foot Locker has been focusing on opening much bigger stores in urban areas that are larger and better leverage technology to offer a more intense and appealing shopping experience, including bringing in popular rappers and other entertainers on site to bring in more people. This does require a real revamping of their business model, but the company is prepared and willing.
Shoe stores also have a real built-in advantage over online retailers. While apparel stores all have this advantage to some extent, offering the real product which can be experienced fully prior to purchase, this is even more important with shoes, and there’s a reason why we try them on before we buy. You just can’t do this by looking at a small picture of the shoes on a website.
If you can further this by making shopping with them a more enjoyable experience, which they are actively seeking to improve, all the better. Foot Locker is still a retail chain though, a rather ordinary one at that, and while they plan on migrating away from this with their urban stores, the volume in most of their locations just don’t support such large transformations.
Their vanilla retail outlets still represent 80% of their business, and while the goal is to take this down to 70%, that still represents a pretty big chunk. Foot Locker’s success is still very much tied to the success of their suppliers, Nike and other big brands that comprise the majority of their sales, but the good news is that these shoe companies are doing a good job of that and this is expected to continue.
Foot Locker’s business is quite dependent upon fashion, where many of their customers will carefully wear a trendy shoe for a time, then sell it and buy the latest new fashion. This is not how men usually buy shoes, but this is how a lot of young men approach it these days, and this of course plays right into Foot Locker’s hand, who are delighted at all this turnover.
Focusing on doing even more to please these customers is certainly a step in the right direction, and their sales are going in the right direction as well. Same store sales are up 9.7% in the fourth quarter of 2018, up from a decline of 3.7% year over year. Analysts are predicting a further 4% increase in sales in 2019, perhaps allowing it to have its stock make it all the way back to where it was 2 years ago.
This would take it about 20% higher than where it is now, and that’s where some analysts have it pegged at. It doesn’t seem unreasonable at all that this company cannot at least fully restore itself given its renewed commitment and focus and its success at the cash register.
Foot Locker has already put in about a 20% gain so far this year, and while we might think that another 20% might be hoping for a little too much, the circumstances actually make this quite plausible. If investors recognize this opportunity enough, it may indeed come to pass.
Editor, MarketReview.com
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.
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