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Prepared for UW Stock Competition Brandon Dewji Jonathan Kim. Foot Locker, Inc. FL – NYSE. Brandon Dewji (BBA 2014). Jonathan Kim (BBA 2015). Source: Company Reports, Bloomberg LLP. COMPANY OVERVIEW. BUSINESS MODEL.
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Prepared for UW Stock Competition Brandon Dewji Jonathan Kim Foot Locker, Inc. FL – NYSE Brandon Dewji(BBA 2014) Jonathan Kim (BBA 2015)
Source: Company Reports, Bloomberg LLP COMPANY OVERVIEW BUSINESS MODEL Foot Locker sells athletic footwear and apparel through its various retail banners, including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, and Footaction. The company operates in the United States, Canada, Europe, Australia, and New Zealand. ALTERNATIVE BANNER STORES MANAGEMENT SHARE PRICE PERFORMANCE CEO, Kenneth Hicks (2010) Key player and visionary in turn-around strategy CFO, Lauren Peters (2011) Substantial experience with FL; VP since 1998 COO, Richard Johnson (2012) Served as CEO of a number of FL banner companies FINANCIAL STATISTICS AND INVESTMENT OUTLOOK 52 - Week Range: $29.15 - $41.25 Price Target: $45.63 Dividend Yield: 2.3% Annual Return: 19.7% Current Share Price:$38.85 Market Cap: $5.70B 2013 EPS: $2.72 FY2014E P/E: 10.30x FY2015E EPS:$3.79 Target Forward P/E: 12.00x Price Implied from Multiple:$45.63 Price Implied from DCF $45.08 OVERVIEW
Source: Company Reports, Bloomberg LLP INDUSTRY OVERVIEW MACROECONOMIC CONDITIONS U.S. HOUSING INDEX • Global consumer confidence returning with cautious optimism • Real increase in U.S. housing prices indicative of economic rejuvenation • While interest rates are rising, they are still low by historical standards • Consumer Confidence Indices returning to pre-2008 levels • Hardline retailers experienced moderate multiple expansion over 2013 • Post-recession outperformance as a result of bullish sentiment • Recent volatility a result of churning ownership – potential for mispricing • Significant upside opportunity exists RELATIVE PERFORMANCE CONSUMER CONFIDENCE OVERVIEW
Source: Company Reports, Bloomberg LLP INVESTMENT RATIONALE THESIS OVERVIEW Foot Locker has been viewed as a turnaround story by investors since 2009, and investors believe this thesis has completely played out, leaving only risks to the business. However, there are still structural improvements to be made in a structurally sound business Foot Locker has material growth ahead, namely in international markets, and in their children’s segment REVENUE BREAKDOWN STORE GROWTH STORE PENETRATION Stores THESIS
Source: Company Reports, Bloomberg LLP THESIS POINT 1 – IMPROVEMENT STORES AND SALES PER GROSS SQ. FT. • CEO Ken Hicks has made considerable improvements to same-store sales growth, EBIT margins, and banner differentiation • Comparable store sales growth has increased from -6.2% in fiscal 2009 to 8.5% in fiscal 2012 • EBITDA margins have gone from 4.8% in fiscal 2009 to 12.0% in fiscal 2012 • Further targets for improvement in margins, inventory turnover, and sales • Management team has always exceeded its own targets for improvement • FL’s inventory per sq. ft. ($95) is above Finish Line’s (FINL’s) $68. Historically, FL’s inventory has been below $70 per sq. ft. as well • Turnaround of women’s banner is nascent • Reformatting underperforming Lady Foot Locker stores, management is growing the SIX:02 concept quickly • Female merchandise makes up a large portion of athletic footwear market (~60%), but demand is fragmented • Women’s clothing is a minority of sales for FL With a robust business model, Foot Locker is still a turn-around story with considerable upside THESIS
Source: Company Reports, Bloomberg LLP THESIS POINT 2 – EXPANSION APPAREL REVENUE • Apparel revenues represent an historically low share of total • On a nominal basis, apparel revenue has yet to surpass its pre-recession highs • Gross margins for apparel revenue are typically 10% above those for footwear, but are lower than footwear margins for FL, providing some room for improvement • Growth will stem from retail and online expansion in Europe • FL acquired Runners Point Group, a German athletic retailer, in July in order to utilize offshore cash • Management has stated it intends to open 60-70 new stores per year, with the majority in Europe • Concerns about the weak economy in Europe are abating. Germany, France, and Italy, significant markets for FL, are experiencing increased consumer confidence levels • European stores average sales per square foot in excess of $600 - consolidated sales per sq. ft. and margins will improve • FINL’s core competency is in running footwear; FL’s main competitive advantage is in basketball footwear and apparel. • While running has done well in recent years, the basketball category has begun to outperform • Children’s footwear and apparel have been exhibiting significant growth and represent long term consumers STORE GROWTH Substantial growth opportunities are being pursued to capitalize on new markets THESIS
Source: Company Reports, Bloomberg LLP VALUATION HISTORICAL EV/EBITDA MULTIPLES HISTORICAL P/E MULTIPLES VALUATION
Source: Company Reports, Bloomberg LLP VALUATION CURRENT TRADING MULTIPLES PROJECTED FINANCIAL RATIOS VALUATION
Source: Company Reports, Bloomberg LLP VALUATION DISCOUNTED CASH FLOW ANALYSIS MARGIN ASSUMPTIONS REVENUE ASSUMPTIONS VALUATION
Source: Company Reports, Bloomberg LLP RISKS AND CATALYSTS RISKS • Foot Locker’s heavy dependence on NIKE may generate concern as a potential supplier threat • NIKE makes up 65% of FL’s sales, however Nike’s relationship with FL is almost symbiotic • There are fewer than 30 full-price Nike retail locations, and there is no indication of an increase • Last year, Nike and FL began testing a new NFL-focused concept together • Changes in fashion and equipment trends could alter demand conditions for Foot Locker’s current offering • Heavy dependence on basketball could prove risky if sports trends change direction • Global macroeconomic conditions could suppress consumer confidence, limiting sales growth CATALYSTS • Management has set further targets for improvement in margins, inventory turnover, and sales • $500 in sales/sq. ft., 11% EBIT margin, 7% net income margin, 14% ROIC, and 3 times inventory turnover • A new $600M share repurchase program was announced in February, and last quarter, management repurchased the greatest value of shares ever in a quarter RECOMMENDATION
Source: Company Reports, Bloomberg LLP RECOMMENDATION RECOMMENDATION Current Share Price: 38.85 Target Share Price: 45.63 Implied Upside: 19.7% SCENARIO EVALUATION – PROBABILITY METHOD • Probability analysis uses an expected return of 0% to approximate probability weightings of each case • Heavy weighting on the bear case implies that market is currently pricing in a bearish sentiment • This is unreasonable, and likely not the case – providing a considerable upside opportunity SCENARIO EVALUATION – COST OF CAPITAL • Cost of Capital analysis considers discount factor required in each scenario if applied to projected multiple • 16% cost of capital required in the bear case represents an unrealistic scenario that • 9% cost of capital in the bull case is not unreasonable – representing feasibility RECOMMENDATION
Prepared for UW Stock Competition Brandon Dewji Jonathan Kim APPENDIX