UNIVERSITY OF OREGON INVESTMENT GROUP
April 21, 2004 Consumer Goods
FOOT LOCKER INC. Stock Data Price (52 weeks) Symbol/Exchange Beta Dividend yield Fully diluted shares Average daily volume Current market cap Book Value per share
MONITOR
26.24 FL NYSE .82 .89% 144,760,000 1,291,954 3.82 Billion 9.552
Daily Closing Price 30 25 20 15 10
Valuation (per share) DCF Analysis Comparables Analysis
27.69 34.02
Summary Financials Revenue Earnings Free Cash Flow
$4,780,000,000 $201,217,790 $101,000,000
5
Thousands
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Dec-03
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0
Volume
4000 3500 3000 2500 2000 1500 1000 500
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Company Overview Foot Locker currently operates under six different brands; Foot Locker, Kids Foot Locker, Lady Foot Locker, Foot Locker International, Champs Sports and Eastbay. It is the biggest Store Base athletic retailer in terms of sales. It has 40,100 employees worldwide Foot Locker with a store base that consists of 3,610 stores as of January 31, 2004. Lady Foot Locker Kids Foot Locker Foot Locker International Champs Sports
Covering Analyst
Joseph Alcock
[email protected] Footlocker
University of Oregon Investment Group http://uoig.uoregon.edu
Foot Locker Foot Locker was founded in the 1970’s by Woolworths and has since developed into a very strong brand that is recognized worldwide. It currently operates 1,448 in the US and plans to add 33 new stores for 2004. Its target market is 12-20 year olds and it provides Men’s athletic apparel, accessories as well as footwear for both men and women. Lady Foot Locker Lady Foot Locker was one of the first off shoots of the Foot Locker brand. It currently has 584 stores and is planning on adding only an additional two stores. It targets 14-35 year old women and provides them with athletic apparel, accessories and footwear. Kids Foot Locker Kids Foot Locker was the second shoot off of the Foot Locker brand. It operates 357 stores and is planning to ad only one store for 2004. Its primary customer is 5-11 years old and it targets the parents who want their child to have name brand athletic apparel.
Foot Locker International Foot Locker International is very similar to the domestic Foot Locker but it adjusts the stores to fit the target market. For instance, European stores generally have more fashion forward sports apparel as well as name brand shoes. This is currently Foot Lockers best attempt for internal growth as it plans on opening 68 stores in 2004. The current break down of the location of the stores is as follows
Europe Canada Austraila New Zealand Guam
Champs Sports Champs Sports was acquired by Woolworths back in 1987 and it has actually positioned itself as a competitor of Foot Locker. It currently operates 581 stores and has plans to open six more this year. Its target market is are 12-25 year olds and provides the same clothing as Foot Locker but in addition it sells athletic equipment. Footlocker.com/Eastbay(direct to customer sales) Footlocker.com is the worlds leading online retailer for athletic equipment, apparel and footwear. This has been the fastest growing segment of Foot Locker and it has been very profitable as well. This segment has partnership agreements with the WNBA, NBA, NFL, United States Olympic Committee as well as Amazon.com. Eastbay started out as a catalog and it has witnessed its catalog sales drop but there has been a huge surge in its internet sales. 2003 2002 2001 This is a very important Athletic Stores 4,413 4,160 3,999 division because its profit Direct-to-Customers 366 349 326 margin is around 50% because Disposed Companies 54 of the low cost to operate and Total Sales
4,779
4,509
4,325
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Footlocker
University of Oregon Investment Group http://uoig.uoregon.edu
maintain the website. The only cost associated with this is the warehouse costs because it already has two very well known brands. Breakdown of Stores The following is a breakdown of store openings for Foot Locker in 2004. The expected number of new store growth is to be 110. Foot Locker International accounts for over 60% of the new stores with 68 to be opened. Foot Locker accounts for 30% with 33 to be opened. Lady and Kids Foot Lockers account for only three new store openings and Champs will open two, one and six store respectively. Number of Stores 1600 1400
Store Openings Foot Locker
Foot Locker
1200
Lady Foot Locker
1000
Lady Foot Locker Kids Foot Locker
Kids Foot Locker
800 600
Foot Locker International
400
Foot Locker International Champs Sports
Champs Sports
200 0 2000 2001 2002 2003 2004
The two graphs above show the direction in which Foot Locker is headed. It appears that they have stopped aggressively growing their Lady and Kids Foot Lockers and their Champs Sports division. They have focused their growth on the main Foot Locker brand but their main growth will come through their growth internationally. Industry Analysis Mall retailing in the past few years has taken a hit from the rapid growth from big box retailers like Wal-mart and Target. Mall traffic has decreased and some experts say that possibly 1/3 of all malls in the United States should be closed. The decrease in traffic has hurt the mall retailers by lowering their sales, or margins by leading to higher markdowns. The silver lining to the dark cloud is beginning to appear with the economy rebounding and more jobs are being created which will help create more income in the economy. More people will be able to “trade up” their pair of Wal-mart’s Shaq brand athletic shoe for a Nike or Adidas from Foot Locker SWOT Analysis Strengths Foot Locker has become the leader in athletic apparel market. This will give it purchasing power to compete against all of its competitors because it will be able to sell the shoes at the lowest price. Foot Locker will be able to use their strength and continue to improve their margins by demanding a better price from its suppliers.
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Footlocker
University of Oregon Investment Group http://uoig.uoregon.edu
Foot Locker is a well positioned brand name known internationally for sports apparel and shoes. Their employees are unmistakable with their referee style jerseys and Foot Locker has been able to play off of the name well, by opening both Kids and Lady’s Foot Locker. They have successfully found its niche and they should be the beacon for consumers who are looking for the best in quality footwear and apparel. Weaknesses Recently Foot Locker has had troubles with Nike, which accounts for 40%of Foot Lockers merchandise. Foot Locker had disappointing sales in 2002 because the higher priced shoes did not move well. Foot Locker decided to change its strategy and provide shoes that will sell better, which did not include Nike’s higher priced shoes. Foot Locker cut their orders for the higher priced shoes and in turn Nike cut their shipment as to Foot Locker as well. Both of these companies need to have a good relationship with each other because they both account for a huge percentage of sales for each other (11 percent of Nikes sales come from Foot Locker). The strained relationship between Foot Locker and Nike is not good for either side but I believe that once a deal is worked out it will have a positive effect on sales for both companies. Comparable Same Store Sales Foot Locker has been restructuring itself for the past few years; it has seen a decrease in the number of stores for both the Lady Foot Locker and Kids Foot Locker stores. It has seen a 0.9% same store decrease for the entire athletic division (including every brand except the online/catalog division). Opportunities Foot Action Last March, Foot Star which operates Footaction, as well as other companies, filed for bankruptcy and put its Footaction chain up for sale. Foot Locker purchased 350 of the stores for 160 million dollars on April 12th, (subject to approval by bankruptcy court). This will be a big gain for Foot Locker because this will give them increased purchasing power, which they can use to drive out better prices from suppliers like Nike. International Growth Europe has been a great growing point for Foot Locker. It provides the customers with fashion forward athletic apparel as well as a strong selection of footwear. Foot Locker is looking into growth into several different countries in Europe as well as in Australia. The opportunity to grow the stores in Europe is there because for the most part there is no solid competition. Threats Cannibalization The spin offs of both the Lady Foot Locker and Kids Foot Locker as well as the growth of Champs has cannibalized sales for Foot Locker Inc. It would appear that the increase of the store base in any of these three divisions would have a negative effect on its flagship brand Foot Locker. Currency Effect Foot Locker is heavily influenced by exchange rates in particular the Euro. For example, sales increased by 6.1%. Excluding the foreign currency exchange rate fluctuations the sales for the athletic department only
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Footlocker
University of Oregon Investment Group http://uoig.uoregon.edu
increased 1.9%. This is a huge risk because if the dollar ever regains the strength it had in 2000, the trend should switch and we would expect to see a decrease in revenue generated by the international division.
Key Ratios Return on Equity 20.00% 15.00% 10.00% 5.00% 0.00% 2001
2002
2003
Foot Locker
This graph shows the return on equity (net income/shareholder equity) for both Finish Line and Foot Locker. Ironically the graphs appear to have similar slopes but because Foot Locker has better profit margins it has a better ROE.
Finish Line
This graph shows the price, volume, and historical P/E ratio. It is important to look at the historical P/E ratio for the company because I believe it is a good key indicator of if a company is over valued. The current P/E ratio is around a 52 week high.
Insider Transactions In the past six months there have not been any insider purchases and there have only been a handful of true sales of stock. There have been many options exercised in the past six months which essentially the management telling us that they believe the company is over valued. Even though the options are being exercised I believe it is normal practice for the executives and is not a reason for concern. Comparables Analysis Finish Line Finish Line is a pure play competitor with Foot Locker. It operates 530 stores in 46 states and has revenues of almost one billion. It is an up and coming competitor with Foot Locker and it has seen same store sales growth of three to four percent. From the annual report and sales figures Finish Line will appear to be a formidable opponent for Foot Locker. For my comparables I used Finish Line and I weighted it at 50% Then, I used 10% for five different clothing retailers. For my comparables I used Price/Book, Price/Earnings, Price/Sales and one that I learned from a
5
Footlocker
University of Oregon Investment Group http://uoig.uoregon.edu
consumer goods analyst at the R.I.S.E. business symposium in Dayton, which is Enterprise Value (market value+ debt minus cash)/EBITDA. Based on these comparables, I was given 34.02 as the fair market value making it undervalued by almost 30%. Discounted Cash Flow For my DCF, I used the risk free rate of 4.4% and used the market premium of 7%. The regressed beta is .82 which gave me CAPM as 10.18%. I then weighted Foot Lockers long term debt and came up with the return on debt to be around 7.18. The WACC came out to be 9.72%. The first DCF is used to show theoretically the DCF that the market is valuing Foot Locker. I valuated this DCF by using very general trends such as profit margins going up as well as sales going up from international growth. The two key points in my DCF are the acquisition of Foot Action, which can be seen as the huge growth in 2004 and 2005, as well as the huge capital expenditure in 2004. As well as the decrease of COGS as a percentage of sales because I believe that Foot Locker will definitely be able to improve its margins as it captures even a bigger share in the athletic apparel industry. I then came up with the implied price to be 30.55 which is close to my comparables and is undervalued as well. The purchasing power that Foot Locker has will let it continue to be the leader in the apparel market but because my DCF came up this undervalued as well as the fact the annual report hid same store sales, I am currently rating this company a Montior.
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UNIVERSITY OF OREGON INVESTMENT GROUP
April 21, 2004 Consumer Goods
Foot Locker Foot Locker FL
Finish Line FL 0.5
American Eagle AEOS 0.1
26.24 144,761,000 3,668,255,000 1,382,757,072 201,217,790 4,780,000,000 3,560,000,000 489,000,000
36.9 23,707,000 874,788,336 312,647,916 46,465,720 985,890,000 778,940,000 75,590,000
2.66 18.91 0.77 7.28
2.81 19.1 0.89 10.3
Weight Price Shares Outstanding Market Capitalization Book Value Earnings Sales Enterprise Value EBITDA Price/Book Price/Earnings Price/Sales Enterprise/EBITDA
Price/Book Price/Earnings Price/Sales Enterprise/EBITDA Implied Share Price Current Price Margin of Safety
Covering Analyst
The Gap GPS 0.1
Hot Topic HOTT 0.1
Pacific Sun PSUN 0.1
Aeropostale ARO 0.1
36.90 23,707,000 874,788,336 69,935,650 46,465,720 1,520,000,000 1,680,000,000 160,840,000
26.78 71,560,000 1,916,376,849 298,405,200 59,394,800 15,850,000,000 19,490,000,000 2,580,000,000
22.16 898,095,000 19,901,785,063 4,831,751,100 978,923,550 572,040,000 1,110,000,000 76,540,000
23.76 48,229,000 1,145,921,051 201,114,930 46,782,130 1,040,000,000 1,710,000,000 164,500,000
22.81 78,462,000 1,789,718,178 536,680,080 80,031,240 734,870,000 1,190,000,000 88,200,000
31.69 123,858,800 3,000,253,116 750,112,654 144,392,604 2,464,636,000 2,907,470,000 344,803,000
2.95 19.1 1.26 9.93
4.17 32 1.26 7.52
5.38 20 2.11 11.33
4.17 25.2 1.72 9.83
6.84 22.3 1.73 12.82
3.76 21.41 1.25 10.29
Implied Values 35.877312 26.2849 39.163768 34.77 34.02 26.24 29.66%
Joseph Alcock
[email protected] Weighted Average
Footlocker
University of Oregon Investment Group http://uoig.uoregon.edu
Foot Locker in millions Revenue(Sales) %Growth COGS % Gross Profit % SG&A Expense % Depreciation % Interest Expenses % Non Reocurring Other Income EBIT % Tax Rate Tax Expense Net Earnings % Depreciation(add back) % Interest Expenses*(1-T) % CF Operations % Net Working Capital % Change in NWC Capital Expenditures % Free Cash Flow
Current Market Valuation 1999a 4,263 -9.0% 3,099 72.7% 1,164 27.3% 985 23.1% 169 3.96% 51 1.2% 85 223 97 2.3% 37.7% 37 60 1.4% 169 4.0% 32 0.75% 261 6.1% 371 8.7% 61 152 3.6% 48.3
2000a 4,356 2.1% 3,047 69.9% 1,309 30.1% 975 22.4% 151 3.47% 22 0.5% 1 16 176 4.0% 39.0% 69 107 2.5% 151 3.5% 13 0.31% 272 6.2% 575 13.2% 204 94 2.2% -26.2
2001a 4,379 0.5% 3,071 70.1% 1,308 29.9% 923 21.1% 154 3.52% 24 0.5% 34 2 175 4.0% 35.5% 62 113 2.6% 154 3.5% 15 0.35% 282 6.4% 710 16.2% 135 116 2.6% 31.4
2002a 4,509 2.9% 3,165 70.2% 1,344 29.8% 928 20.6% 149 3.30% 26 0.6% -2 3 246 5.5% 34.4% 85 161 3.6% 149 3.3% 17 0.38% 328 7.3% 725 16.1% 15 150 3.3% 162.5
2003a 4,777 5.6% 3,302 69.1% 1,475 30.9% 987 20.7% 147 3.08% 18 0.4% 1 0 322 6.7% 36.0% 116 206 4.3% 147 3.1% 12 0.24% 365 7.6% 750 15.7% 25 144 3.0% 195.7 PV NPV
10 year Bond Rate Market Risk Premium Beta Return on Debt CAPM % Equity (e/d+e) % Debt (d/d+e) WACC Terminal Rate
4.4% 7.0% 0.82 7.18% 10.18% 91.9% 8.1% 9.72% 3.00%
2004e 5,600 14.7% 3,920 70.0% 1,680 30.0% 1,157 20.7% 224 4.00% 30 0.5% 0 0 269 4.8% 36.0% 97 172 3.1% 224 4.0% 19 0.34% 415 7.4% 890 15.9% 140 310 5.5% -35.0 -31.9 795.2
2005e 6,125 8.6% 4,226 69.0% 1,899 31.0% 1,286 21.0% 233 3.80% 43 0.7% 0 0 337 5.5% 36.0% 121 216 3.5% 233 3.8% 27 0.45% 476 7.8% 974 15.9% 83 190 3.1% 202.4 168.1
2006e 6,493 6.0% 4,415 68.0% 2,078 32.0% 1,363 21.0% 247 3.80% 45 0.7% 0 0 422 6.5% 36.0% 152 270 4.2% 247 3.8% 29 0.45% 546 8.4% 1,032 15.9% 58 201 3.1% 286.1 216.6
2007e 6,882 6.0% 4,680 68.0% 2,202 32.0% 1,445 21.0% 262 3.80% 48 0.7% 0 0 447 6.5% 36.0% 161 286 4.2% 262 3.8% 31 0.45% 579 8.4% 1,070 15.9% 38 213 3.1% 327.5 226.0
Terminal Value PV of Terminal Value Total Value future CF Long Term Debt PV of Equity Shares Outstanding Implied Share Price
4110.8 336.0 3774.8 143.8 $26.25
Intrinsic Value Current Value
$26.25 26.24
Margin of Safety
2008e 7,295 6.0% 4,888 67.0% 2,407 33.0% 1,532 21.0% 277 3.80% 51 0.7% 0 0 547 7.5% 36.0% 197 350 4.8% 277 3.8% 33 0.45% 660 9.0% 1,160 15.9% 90 226 3.1% 344.1 216.4 5272.7 3315.6
0.0%
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Footlocker
University of Oregon Investment Group http://uoig.uoregon.edu
Foot Locker in millions Revenue(Sales) %Growth COGS % Gross Profit % SG&A Expense % Depreciation % Interest Expenses % Non Reocurring Other Income EBIT % Tax Rate Tax Expense Net Earnings % Depreciation(add back) % Interest Expenses*(1-T) % CF Operations % Net Working Capital % Change in NWC Capital Expenditures % Free Cash Flow
1999a 4,263 -9.0% 3,099 72.7% 1,164 27.3% 985 23.1% 169 3.96% 51 1.2% 85 223 97 2.3% 37.7% 37 60 1.4% 169 4.0% 32 0.75% 261 6.1% 371 8.7% 61 152 3.6% 48.3
2000a 4,356 2.1% 3,047 69.9% 1,309 30.1% 975 22.4% 151 3.47% 22 0.5% 1 16 176 4.0% 39.0% 69 107 2.5% 151 3.5% 13 0.31% 272 6.2% 575 13.2% 204 94 2.2% -26.2
2001a 4,379 0.5% 3,071 70.1% 1,308 29.9% 923 21.1% 154 3.52% 24 0.5% 34 2 175 4.0% 35.5% 62 113 2.6% 154 3.5% 15 0.35% 282 6.4% 710 16.2% 135 116 2.6% 31.4
2002a 4,509 2.9% 3,165 70.2% 1,344 29.8% 928 20.6% 149 3.30% 26 0.6% -2 3 246 5.5% 34.4% 85 161 3.6% 149 3.3% 17 0.38% 328 7.3% 725 16.1% 15 150 3.3% 162.5
2003a 4,777 5.6% 3,302 69.1% 1,475 30.9% 987 20.7% 147 3.08% 18 0.4% 1 0 322 6.7% 36.0% 116 206 4.3% 147 3.1% 12 0.24% 365 7.6% 750 15.7% 25 144 3.0% 195.7 PV NPV
10 year Bond Rate Market Risk Premium Beta Return on Debt CAPM % Equity (e/d+e) % Debt (d/d+e) WACC Terminal Rate
4.4% 7.0% 0.82 7.18% 10.18% 91.9% 8.1% 9.72% 3.00%
2004e 5,635 15.2% 3,945 70.0% 1,691 30.0% 1,164 20.7% 225 4.00% 30 0.5% 0 0 271 4.8% 36.0% 97 173 3.1% 225 4.0% 19 0.34% 418 7.4% 850 15.9% 100 310 5.5% 8.0 7.3 898.0
2005e 6,544 13.9% 4,516 69.0% 2,029 31.0% 1,374 21.0% 249 3.80% 46 0.7% 0 0 360 5.5% 36.0% 130 230 3.5% 249 3.8% 29 0.45% 508 7.8% 916 14.0% 66 190 2.9% 252.2 209.5
2006e 6,937 6.0% 4,717 68.0% 2,220 32.0% 1,457 21.0% 264 3.80% 49 0.7% 0 0 451 6.5% 36.0% 162 289 4.2% 264 3.8% 31 0.45% 583 8.4% 1,041 15.0% 124 201 2.9% 257.6 195.0
2007e 7,353 6.0% 5,000 68.0% 2,353 32.0% 1,544 21.0% 279 3.80% 51 0.7% 0 0 478 6.5% 36.0% 172 306 4.2% 279 3.8% 33 0.45% 618 8.4% 1,103 15.0% 62 213 3.1% 342.4 236.3
Terminal Value PV of Terminal Value Total Value future CF Long Term Debt PV of Equity Shares Outstanding Implied Share Price
4728.5 336.0 4392.5 143.8 $30.55
Intrinsic Value Current Value
$30.55 26.24
Margin of Safety
14.1%
2008e 7,794 6.0% 5,222 67.0% 2,572 33.0% 1,637 21.0% 296 3.80% 55 0.7% 0 0 585 7.5% 36.0% 210 374 4.8% 296 3.8% 35 0.45% 705 9.0% 1,169 15.0% 66 242 3.1% 397.5 250.0 6091.3 3830.4
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