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Foot Locker
Matt's Fundamental Stock Analysis
Content Disclaimer: I am only a retail investor and I only intend these reports to be used as a guidance. I recommend you do your own research as this will better help you to understand how companies work and operate and what drives their growth. What stocks you decide to purchase, should be chosen by you and this report is made only to display companies which I think are worthwhile to look at and discuss. Just because it is a good company or I like the company does not mean that it will do good in the future. If you want to copy or replace my report, please do so with a link connecting to my blog.

Foot Locker (FL) Company Business Foot Locker is a global retail leader in athletic footwear and apparel. As of January 2011, they owned 3,426 stores in the U.S., Canada, Europe, Australia, and New Zealand. They sell through their athletic stores and also through direct -to-consumers segment which includes catalogues, e-commerce, and mobile devices. They operate under Foot Locker, Lady Foot Locker, Kids Foot Locker, Champ Sports, Footaction, and CCS, as well as Direct-to-Consumers and Franchise operations. Additional Information: CEO has completed his first annual term with Foot Locker o Long-term Objectives with current plan Sales of $6 billion EBIT Margin of 8% Net Income Margin of 5% ROIC of 10% Inventory Turnover of 3x Continue growing in Europe as well as search for new international markets Noticing a decreasing number of stores growth trend and a decrease in capex o Meaning that they are focusing more on making their stores more efficient and to reduce their costs than they are focused on expanding and growing May be due to the European troubled markets In 2009, FL made a strategic decision to reduce capital spending and focus on projects that improve the customer experience with their business in order to conserve cash o To me this means that they have realized they have minimal growth left and are more focused on being more efficient, but that may be hard as costs continue to rise Repurchase Program o Fiscal 2010 Repurchased 3.215 million shares for $50 million Financial Statement Notes: Dividend increased 10% to $0.165 per share in Q1 2011 Capex is expected to amount to $153 million in fiscal 2011 They have a lot of impairment charges, either asset impairment or trade name apparent, and quite frequently Effective tax rate expected to be 37% for fiscal 2011

Pension Expense expected to be $20 million in 2011 o As of Fiscal 2010, pension plans were unfunded by $68 million o Expected future pension benefits

Threats: Cyclical business and is dependent on the overall health of the economy Increase in fuel costs will increase their cost of sales o They hedge a portion of this risk through forward contracts They are exposed to foreign currency risk They are very focused on a few vendors o In 2010 and 2009, FL purchased approx. 82% of its merchandise from its top 5 vendors and this is expected to continue into the future o In 2010, 63% was purchased from one vendor, Nike, and 68% was purchased from them in 2009

Also, to me I am not seeing how they are going to increase their sales by almost another billion mainly due to the fact that I do not see any growth or new stores being opened in the international markets.

Historical Ratio Analysis **If the value is green than the number is believed to be better than the previous number, vice versa if the value is
red

Profitability Ratios
ROE ROA ROIC CROIC

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

13.8% 6.2% 9.1% 23.6%

15.1% 7.7% 10.3% 23.2%

16.0% 9.1% 10.5% 21.4%

13.0% 8.0% 10.2% 22.7%

10.9% 7.7% 9.4% 22.0%

2.2% 1.6% 6.4% 13.5%

-4.2% -2.8% 7.2% 8.3%

2.5% 1.7% 3.9% 10.7%

8.3% 5.8% 7.6% 14.7%

13.2% 9.1% 11.4% 22.3%

Ratios are back to historical high's which shows the strength the new CEO has brought to FL
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Solvency Ratios
Quick Ratio Current Ratio Total Debt/Equity Ratio Long Term Debt/Equity Ratio Short Term Debt/Equity Ratio

0.78 2.24 1.24 0.32 0.00

1.10 2.79 0.96 0.24 0.00

1.00 2.68 0.77 0.19 0.01

1.06 2.81 0.63 0.14 0.03

1.42 3.94 0.42 0.10 0.01

1.56 4.12 0.43 0.10 0.00

1.54 4.22 0.50 0.07 0.00

1.70 4.09 0.45 0.07 0.00

1.79 3.96 0.43 0.07 0.00

1.84 3.79 0.45 0.06 0.00

Has reduced their debt and is more liquid compared to the past
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Efficiency Ratios
Asset Turnover Cash % of Revenue Receivables % of Revenue SG&A % of Revenue R&D % of Revenue
Liquidity Ratios
Receivables Turnover Days Sales Outstanding Days Payable Outstanding Inventory Turnover Average Age of Inventory (Days) Intangibles % of Book Value Inventory % of Revenue

1.81 7.9% 0.0% 20.6% 0.0%


2003

1.78 9.4% 0.0% 20.7% 0.0%


2004

1.65 4.2% 0.9% 20.3% 0.0%


2005

1.71 5.1% 0.0% 20.0% 0.0%


2006

1.77 3.8% 1.0% 20.2% 0.0%


2007

1.67 9.0% 1.2% 21.6% 0.0%


2008

1.82 7.4% 1.1% 22.4% 0.0%


2009

1.72 12.0% 0.0% 22.6% 0.0%


2010

1.74 13.8% 0.0% 22.5% 0.0%


2011

1.84 15.1% 0.9% 22.1% 0.0%


2012

0.00 0.0 28.9 3.79 96.30 19.5% 18.5%

0.00 0.0 25.9 3.76 97.00 16.9% 19.3%

12.47 3.2 37.4 3.59 101.55 22.2% 21.5%

11.23 0.0 33.4 3.28 111.29 18.7% 22.2%

8.37 3.8 23.3 3.14 116.26 4.6% 22.7%

0.82 4.3 21.2 3.11 117.40 4.2% 23.6%

-1.29 4.2 18.1 3.15 116.01 5.9% 21.4%

1.60 0.0 22.3 3.27 111.77 5.1% 21.4%

0.00 0.0 23.0 3.37 108.27 3.6% 21.0%

11.12 3.2 22.9 3.60 101.48 2.6% 19.0%

Have been controlling their inventory very well recently as is evident as inventory as % of Revenue, along with the average age of inventory
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

P/E P/S P/Tang BV P/CF P/FCF

6.98 0.25 1.24 2.36 2.45

14.68 0.65 2.73 6.18 6.27

12.12 0.67 2.51 6.12 6.55

11.38 0.53 1.83 5.12 5.11

10.91 0.48 1.25 4.56 4.56

28.45 0.27 0.67 0.94 3.94

-18.94 0.29 0.84 1.63 7.40

43.43 0.42 1.10 5.55 7.99

17.78 0.59 1.53 7.52 8.44

16.46 0.81 2.22 8.68 8.20

On a relative price multiples basis, FL looks to be overvalued

Relative Ratio Comparison FL does not classify its competitors in their latest's annual statement. However, I believe there direct competitors to consist of Finish Line (FINL), Dick's Sporting Goods (DKS), Collective Brands (PSS), and Wal-Mart (WMT). Keep in mind that their direct and biggest competitor by far is Finish Line.
$ $ $ $ $ DKS 48.08 5,840.00 5,270.00 49.97 29.10 65.2% 22.9 1.1 4.2 15.4 33.3 9.6 1.0% 0.4% 0.0% 23.3% 6.1% 1.1% 10.9% 24.7% 40.9% 15.6% 0.9 2.0 0.1 0.1 30.6% 29.3% 8.3% 5.6% 5.1% 3.1% 9.4% 6.2% 17.6% 12.9% 142.2 3.8 1.9 $ $ $ $ $ PSS 19.66 1,190.00 1,620.00 23.16 9.11 115.8% 0.0 0.3 0.0 0.0 0.0 8.0 0.0% 0.0% 0.0% 0.0% 5.4% 0.3% 4.4% -328.6% -258.2% 0.0% 0.9 2.2 0.9 0.9 29.7% 32.9% -0.8% 2.2% -4.4% 0.3% -7.1% 0.4% -22.4% 0.1% 26.6 4.4 1.6 $ $ $ $ $ WMT 61.20 208,360.00 255,340.00 62.63 48.31 26.7% 13.5 0.5 4.1 8.5 36.6 7.4 2.6% 0.0% 16.9% 31.9% 5.9% 0.5% 5.1% 7.1% 8.2% 9.2% 0.2 0.9 0.7 0.7 25.0% 25.1% 5.9% 5.9% 3.7% 3.6% 8.8% 8.7% 22.6% 21.4% 81.1 8.7 2.4 FL $ $ $ $ $ 31.05 4,720.00 4,000.00 32.27 16.66 86.4% 17.2 0.8 2.5 12.2 19.3 7.3 2.3% 3.9% 10.5% 36.2% 7.9% 0.8% -0.4% 45.0% 67.2% 2.7% 1.8 3.8 0.1 0.1 31.9% 28.7% 7.7% 2.4% 4.9% 1.8% 9.4% 3.1% 13.5% 4.4% 0.0 3.6 1.9 $ $ $ $ $ FINL 21.22 1,100.00 796.82 26.16 16.42 29.2% 13.2 0.8 2.1 0.0 0.0 4.9 1.1% 1.0% 16.0% 12.7% 18.6% 0.8% 0.6% 29.4% 27.9% 13.8% 2.4 4.0 0.0 0.0 35.1% 32.4% 9.8% 5.0% 6.2% 3.1% 12.3% 6.0% 16.6% 8.4% 0.0 4.3 2.0

Stock Price Mkt Cap ($M) EV 52 Wk High 52 Wk Low % off 52Wk Low

Multiples
P/E(TTM) P/S(TTM) P/Tang BV(MRQ) P/CF P/FCF(TTM) EV/EBITDA(TTM)

Dividends
Div Yld Div Yld - 5yr avg Div 5yr Grth Payout Ratio(TTM)

Growth Rates
Sales(MRQ) v 1yr ago Sales(TTM) v 1yr ago Sales 5yr Grth EPS(MRQ) v 1yr ago EPS(TTM) v 1yr ago EPS 5yr Grth

Balance Sheet
Quick Ratio(MRQ) Current Ratio(MRQ) LTD/Eq(MRQ) Tot D/Eq(MRQ)

Margins
Gross %(TTM) Gross % 5yr Op %(TTM) Op % 5yr avg Net %(TTM) Net % 5yr avg

Returns
ROA(TTM) ROA 5yr avg ROE(TTM) ROE 5yr avg

Efficiency
Rec Turnover(TTM) Inv Turnover(TTM) Asset Turnover(TTM)

On a relative multiples basis DEST looks fairly-valued compared to competitors Currently has a higher dividend yield than competitors, excluding Wal-Mart Take on less debt than their competitors Sales growth figures are slacking over a long-term basis, but during the past year they are clearly outperforming their competitors growth rates Long-term ROA and ROE are slacking compared to competitors

Investment Valuations Reverse DCF Starting with a reverse DCF valuation, I will assume a discount rate of 12% and a terminal growth rate of 2.5%. (The terminal growth rate of any company should never be higher than the growth rate of the economy.) A reverse DCF valuation should be used just to see a rough picture of where the market has currently priced FL based on fundamentals. Based on my assumptions the market has currently priced FL to have a FCF growth rate of around a 2-3% year after year for the next 10 years with it gradually decreasing over the years, where then it will grow at its terminal growth rate. The range of the FCF growth is given due to the difference between TTM, annual, and average owners earning FCF input. This is a rough estimate number, however this is above its 5 year and 10 year historical averages. FCF growth is best to be looked at over multi-year periods as it is very volatile on a year to year basis. Actual Owners Earnings DCF This is the heart of my valuation of a company. I believe that a more reasonable estimate of around 0% for the next 10 years with it slowing down in the later years. Under my assumptions, I believe the intrinsic value to be around $25.97 on the safe side and on the more optimistic side $28.16. They have failed to increase their FCF over the long-term and I am not convinced of any growth story that I have heard from them.

35 30

5 Yr Price vs Intrinsic Value

25 20
15 10 5 0 18/07/2005 18/07/2007
Historical Price

18/07/2009
Intrinsic Value

18/07/2011
Buy Price

Graham Valuation The graham valuation is based upon EPS growth over time and includes analysts estimates of future EPS. I require a huge amount of margin of safety for this model as it is not as accurate as FCF, so around a 6080% discount. Based on this model with a long-term EPS growth rate of 0% and an expected EPS fiscal 2012 of $2.24, the intrinsic value comes out to $17.74 making it fairly valued. FCFE Valuation The growth rate for this model is built around fundamentals, where it is equal to the non-cash return on equity multiplied by the equity reinvestment rate which gives us a net income growth rate of 24.89%. Reason being that we do not want to just guess a growth rate and it is better to get one from fundamentals, obviously the option to adjust these ratios can occur if needed. I believe this growth rate in net income is overstated and that the growth rate phase is already completed. Therefore, I will assume that net income grows at the terminal growth rate of 2.5%. According to this model, the intrinsic value is roughly around $22.82 making it largely over-valued. Technical Analysis Looking at the chart below, technical analysis provides quite a bit key price points.

Overview From a fundamental perspective, I have a neutral rating on this stock. Although, I do believe the stock to be over-valued with the current price. If the stock price goes low enough, I would definitely consider purchasing this stock. Although, I do not see much concerns with Foot Locker, I am having trouble seeing a growth story. I would not pay more than $15 for this stock. Stock Rating: Hold Price Target: $24-$26 Best Regards, Matthew

Matt's Fundamental Stock Analysis


Content Disclaimer: I am only a retail investor and I only intend these reports to be used as a guidance. I recommend you do your own research as this will better help you to understand how companies work and operate and what drives their growth. What stocks you decide to purchase, should be chosen by you and this report is made only to display companies which I think are worthwhile to look at and discuss. Just because it is a good company or I like the company does not mean that it will do good in the future. If you want to copy or replace my report, please do so with a link connecting to my blog.