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Module 9- Foot Locker, Inc.

Module 9- Foot Locker, Inc. Taylor Blaney. Sporting Goods Stores Industry. Overview Sporting goods stores sell sporting equipment typically from outside goods manufacturers Goods in the industry range from camping equipment to basketball hoops to shoes

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Module 9- Foot Locker, Inc.

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  1. Module 9-Foot Locker, Inc. Taylor Blaney

  2. Sporting Goods Stores Industry • Overview • Sporting goods stores sell sporting equipment typically from outside goods manufacturers • Goods in the industry range from camping equipment to basketball hoops to shoes • Annual Revenue for the sporting goods industry is over $42 billion and annual growth is steady around 2.5%-3.5% however the number of companies is slowly declining

  3. Foot Locker Overview • Global retailer of athletic shoes and apparel • Located primarily in North America, Europe, Australia, and New Zealand • Largest retailer of athletic shoes in the U.S. • Nearly $6.2 billion in sales in 2012 (73% within U.S.) • Develops few products, mostly supplied by a few top-end product manufacturers • Operate in two ways: • Athletic Stores • Direct to Customers

  4. Foot Locker in the Industry • Market share-11.2% • No threat of acquisition • Reasons for growth • Recent consumer confidence has lead to growth in shoe sales • Exclusive contracts with suppliers • Growing Online Retail • Adolescent Demographic • Largest buyer of basketball shoes in U.S.

  5. Valuation of Equity • Two formulas can be used to determine the equity value per share • Must separate out the debt to find out estimated equity value • To find estimated stock price divide equity valuation by common stock outstanding

  6. Effect Change in WACC and Growth have on estimated stock price

  7. Effects • Increase in WACC causes stock price to increase slower with growth and decrease faster with less growth • The lower WACC allows growth to have a greater effect on stock price as it increases • Lower WACC also lowers the effect on stock price that decreases in growth have

  8. Sensitivity Analysis of Enterprise Value • Shaded is where you should sell, not shaded regions should either buy or hold

  9. Analyst Forecast • Can use the analyst forecasts for dividend growth and earnings per share growth to determine future stock price • Two models • One focuses on the dividends and earnings per share as they effect book value • The other focuses on residual earnings

  10. Dividend forecast model • Takes analyst estimate of dividend growth in the short term to determine a forecast of what an investor would receive if they liquidate their investment at the forecast horizon • Information needed:

  11. Dividend Model

  12. Conclusions • Share price investor receives at horizon: $44.81 • This amount is an increase from the $37.89 estimated current amount • Utilized this equation to determine the price: • Must compare this price with price determined from residual earnings model

  13. Residual Earnings Model • Growth rate of 2% was assumed for this model • Need to take earnings determined from dividend model an calculate the book value per year to find horizon stock price

  14. Residual Earnings Model • Residual earnings model determines the earnings per year and calculates a growth % to determine if a stead state of growth has occurred • Utilizes this equation to determine the horizon stock price:

  15. Model

  16. Conclusions • Residual earnings model returned a horizon price of $44.54 • This is also an increase from the current determined stock price • Signifies that a buy recommendation is a good possibility

  17. More Conclusions • Current estimated stock price is $37.89 • Estimated stock prices from dividend and residual earnings models: $44.81 and $44.54 • These horizon stock prices seem to indicate that a steady state is close to being reached • Cannot take these as set prices because of the analyst bias to be optimistic in their reports • Current stock price is $45.84 • This is most likely due to updated information, 10K comes out in next 2 weeks

  18. Other • No mid year or adjusted valuations were done due to the fact that new information will be coming out very soon • These estimations would cover more than 12 months time and be very speculative

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