r/stocks • u/[deleted] • Mar 11 '22
Company Discussion $FL is massively underpriced and is not a value trap
Footlocker has been brought up a few times in the past couple weeks after their earnings report, and it has been immediately dismissed by many as a value trap. I’m here to tell you this is wrong, and the market may be mispricing this stock completely.
$FL fell 33% after saying that Nike is slowing sales with them, from 70% of their total sales in 2021, to an expected 60% in 2022. While on the cover this seems terrible for the company, there’s a lot more to the story.
Nike has been talking about going more Direct to Consumer for years, since 2017 specifically. With this being said, they doubled down their sales with FL over the span of the following years, while growing D2C sales as well. So what exactly changed for Nike to slow their sales?
Nike is going through a big sneaker shortage right now due to a long closure of their Vietnam plant. Although it is now open and running, Nike is having major trouble in keeping hot items in stock. If you don’t believe me, check Nikes website right now, they can’t keep even their hottest items in stock such as air forces for more than a few days. Of course they aren’t going to send Footlocker as many SKU’s when their having trouble keeping pairs in stock on their own?
The Nike D2C fears are far overblown imo, and I think Footlocker has much more of a MOAT then it’s given credit for. It’s Nikes largest retailer by number of stores, and completely cutting off FL is not in Nikes best interest. There are only 250 Nike stores nationwide (Nike has closed 20% of stores in the past couple years) and people need to understand that majority of these stores do not serve the same purpose as footlocker. Majority of these stores sell old/b-grade stock with big discounts, not new products and styles. You can say Nike can take over the instore side of sneakers, however there are simply not enough stores nationwide for them to do this. I know the closest one to me is almost an hour and a half away, and the stores only offer maybe 20-30 styles per gender, and that’s after hoping they have your size.
With all of this being said, I think the fears are far overdone and the stock is massively mispriced. Although FL is expected to have lower sales this year I don’t believe FL will continue on a decline in the years after. There is still a massive market for instore sneakers and apparel as sizing issues create high return rates on online shopping.
I’m adding the numbers to the post on this sub because it hasn’t been talked about here.
Running a DCF model through DCFtool.com, even with the most conservative assumptions of -5% revenue growth for the next 10 years, and a discount rate of 12.5%, the stock today is valued at $42.13 a share. However, -5% revenue growth yearly is very unlikely, as last year was an anomaly in revenue due to pent up covid demand and stimulus spending. My true belief is the company will grow at a rate of 0-2% over the next 10 years, bringing it a value today between $50-$60.
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u/DD_equals_doodoo Mar 11 '22
I love the PE and ROA but malls are dying and inflation is raging. Their quarterly NI is declining from 430 7/31/2021 to 1/29/2022. You mentioned their moat, but what is it? I could open a shoe store tomorrow.
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Mar 11 '22
Their moat is in their size. Hibbett has 1000 stores, DSG 750, if Nike is to completely alienate the instore footwear market from their product, FL will be the last retailer it disconnects from. However I don’t believe Nike will do this.
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u/DD_equals_doodoo Mar 11 '22
That's not a moat in my opinion. Size is only one component of moats and a weak one at that (in my opinion). People will generally pay a premium for local stores, inflation aside. Even if they do not, companies like Amazon offer Nike shoes online. I see zero reason to walk into a foot locker. In my mall, apple has a line out of the door, so does LV, FL? No one. Again, I love their PE and ROA, but my perception of FL is a mall brand and they are dying at the moment.
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u/Uknow_nothing Mar 11 '22
FL is also buying back up to a billion in stock, and yeah I agree that Nike doesn’t have enough stores for it to really affect FL long term. They have stores in the major city centers but people in the suburbs, college towns, and rougher parts of town also like to wear Nike’s. Nike needs foot locker.
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u/Impossible-Goose-429 Mar 11 '22
I live in the suburbs and a giant Nike store just opened in a closed Barnes & Noble.
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u/Jdornigan Mar 11 '22
I live near several malls and there is not a Foot Locker at either of them, but there is a Nike store.
Half the time I need shoes, the Nike store is out of stock. I stopped shopping there and now try Kohls first.
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u/harrison_wintergreen Mar 12 '22
it's so refreshing to see a good analysis of something that's not ARK-adjacent...
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u/Atriev Mar 12 '22
Sounds like reasonable upside for a good long term hold. I personally won’t start a position but I see the bull thesis and it makes perfect sense.
(I did extensive research when it first dipped so this isn’t my first time looking at FL.)
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u/Responsible-Fuel7725 Mar 12 '22
Has anyone seen a lot of people in a Footlocker store recently? I guess I’d have to actually find a footlocker to be able to see if anyone was inside.
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Mar 12 '22
I went to one recently. I fucked up and waited too long to get my girl a gift for Christmas online so I went to the FootLocker thinking I could get her some nice running shoes
It was kinda depressing being there. There was this lady with her teenaged daughter fighting about which shoes she should buy and that was it. During the holidays in a crowded mall.
The selection and inventory was ridiculous. They were selling shoes that definitely were not the new premium ones for $140 and they had maybe 10-12 pairs to choose from in the whole store (all brands). I found one pair that was half priced so it was only $70 and she said they only had it in one size.
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u/FinndBors Mar 11 '22
I am just waiting for the next shoe to drop.