Description

Footlocker stock is very safe and trades at 62% of its intrinsic value. FL is the premier athletic footwear retailer in the United States commanding 20% of the $16 billion dollar US athletic footwear market and 8% of the $10 billion dollar European market. The company has no net debt, produces strong free cash flows and has a share-holder friendly management team. Management recently pre-announced sales. Full earnings will be released this Thursday after market close (8/18) with a call on Friday morning.

In March 2003 manv785 did a great job writing up this idea at $10.78. Now the stock has doubled but the management team is further along in their turn-around plan and the valuation today is similar to what it was then. This write up will serve to update VIC members on the numbers and the current state of the turn-around plan.

EBIT margins are 7.4% but management has a credible plan to improve them to 8.5% in the ‘very, very’ near term and 10% ‘longer-term’.

In the late 90’s and early 2000 FL experimented with a large footprint concept that combined many of their brands into a single location. Management has repeated that this has been an utter flop and as these leases come up for renewal FL has been abandoning the concept and replacing them with more productive, smaller, single-themed stores.

Management is improving margins by renegotiating leases at mall based stores, opening cheaper off-mall stores, and closing unproductive stores as their leases expire. Additionally, as FL grows and gains density in Europe, Asia and the US they should continue to benefit from scale and improve margins.

In the past 2 years, sales/square foot has increased from $316 to $345 and the balance sheet has improved from a net debt to a net cash position.

DESCRIPTION:

Footlocker operates 6 major brands:
Footlocker: 2,135 stores, target customer 12-20 year olds
kidsFootLocker: 346 stores, target customer 6- 11 year olds
Champs: 570 stores, target customer 10 -25 year olds. Apparel, equipment and footwear
FootAction: 349 stores, target urban youth, fashion forward street wear
Lady FootLocker: 567 stores; target 18-29 year old females
Total: Just under 4,000 stores world-wide
Footlocker.com/Eastbay: Direct to customer channel (Internet/Catalog)
Domestic Stores make up 67% of sales (down from 83 % 6 years ago)
Direct to customer is 7% of sales
International has gone from 12% of sales in 1998 to 26% of sales in 2004

FINANCIAL SUMMARY:

LTM Revenue: $5.6 B
EBIT margins: 7.4%
MGMT short-term EBIT goal: 8.5%
MGMT Long-term EBIT goal: 10%

FULL YEAR PROJECTIONS:

Revenue 2005E: $5.7 B
Revenue 2006E: $5.9 B
Revenue 2007E: $6.1 B

2005 EBITDA: $616 mm
2006 EBITDA: $696 mm
2007 EBITDA: $780 mm

2005 EBIT: $456 mm (@8% EBIT)
2006 EBIT: $531 mm (@9% EBIT)
2007 EBIT: $610 mm (@10% EBIT)

2005 Total Cap-Ex: $180mm
2006 Total Cap-Ex: $180mm
2007 Total Cap-Ex: $180mm

2005 FCF: $276 mm. 162.6 mm f/d shares = $1.70/share
2006 FCF: $327 mm. 167.5 mm f/d shares = $1.95/share
2007 FCF: $381 mm. 172.5 mm f/d shares = $2.21/share

CASH BUILD:

Fiscal 2005E Net Cash $376 mm
Fiscal 2006 Cash Build $327 mm
Fiscal 2006 Cash from Options $107 mm
Fiscal 2007 Cash Build $381 mm
Fiscal 2007 Cash from Options $110 mm
TOTAL JAN 08 $1301mm
CASH per Share $1301mm/172.5 f.d shares= $7.54

VALUATION

2007 FCF $2.21/share * 12.5 = $27.63
Plus $7.54 in cash
Stock Price of $35.17

KEY ASSUMPTIONS:

Retail square footage expansion of 1-2%
Year over year Same Stores Sales and Internet/Catalog growth of 1-2%
Vest all options and take in cash
3% year over year share growth
Ignore Interest Income/Expense
No major acquisitions
$155 mm in pension/retirement under funding that we haven’t accounted for
FCF approximates cash build
36.5% Tax Rate (per guidance)


RISKS:

Consumer spending slowdown
Nike accounts for 40% of product mix

Catalyst

Continuing real estate rationalization and margin improvements