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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