Foot Locker: Management Dedicated to Increasing Shareholder Value

by: John Bethel posted on: July 27, 2007 | about stocks: FL

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I bought Foot Locker Inc. (FL) on Wednesday and the shares ended the day at $20.87. Foot Locker is the largest special athletic footwear retailer in the US and one of the largest in the world.

The stock has suffered recently because of unfavorable prospects for the industry in general, and because of weak results for Foot Locker itself. I see these as near-to-intermediate term challenges and anyone investing in Foot Locker with a time frame up to 5 years will be rewarded.

Foot Locker has a market cap above $3 billion with more than 155 million shares outstanding. The dividend yield is more than 2%. It trades for less than 1.5 times book value and for less than two-thirds annual sales. The company has a strong balance sheet -- the current ratio is more than 3-to-1 and there’s no debt net of cash.

Management seems committed to increasing shareholder value. This could be accomplished through share repurchases, boosting the dividend or a takeover. That last option made news earlier this month when the New York Post reported Foot Locker is seeking to sell itself. According to the story, Foot Locker has hired Lehman Brothers to advise it on a possible sale. Apollo Management LP is supposedly considering an offer of $29 a share, and billionaire Mike Ashley, owner of Sports Direct International in the UK, is reportedly interested.

Foot Locker, Apollo and Sports Direct refused comment, as would be expected. The stock rose to $22.71 the day the Post story ran, but has since fallen back.

I didn’t buy the stock anticipating a quick sale of the company. I think that’s possible. And that possibility along with the other options available to management due to the sterling balance sheet makes the long-term prospects for Foot Locker favorable.

The main risks with this stock pick involve the possibility of worsening economic conditions and declining consumer discretionary spending. I believe those would prove to be near-to-intermediate term events, yet I could always be wrong. So be sure to do your own due diligence before buying this or any stock.

Disclosure: Author is long FL

FL 1-yr chart