Explained: What is the intrinsic value of Foot Locker?
On today’s show we have assembled the TIP mastermind group for the 4th Quarter of 2020 to talk about the intrinsic value of Foot Locker.
Stig Brodersen
All of that being said, Foot Locker clearly has a very inaudible moat. I think that’s quite obvious but I also think there are a few things that’s a bit different to understand for something like footwear. It’s just controlled in a different way than say, mass apparel.
It’s not as fragmented and the competitive situation is actually more fierce. It’s just constructed differently with the way you have a few huge producers. The price competition is not the same thing because the pricing of sneakers is very similar across many different distribution channels. It’s tightly controlled by these massive companies like Nike.
Foot Locker is the biggest independence sneaker seller in the US. Whenever we think of size, we typically think well, that means they have a lot of pricing power. They can go in like Walmart and go in and negotiate with the supplier.
Well, they can’t do that with a company like Nike, but what is in that deal, just using that as an example, but it’s prevalent in that industry is that you will not compete on price.
You have a store like Foot Locker that will target mid and low income families, not so much the inaudible markets that Nike can do in their own stores. A company like Foot Locker gets the preferred treatment that they will get their own collections and they will get just after Nike.
If you’re going to inaudible or Finish Line that’s now being acquired by JD Sports, you won’t get the same thing. So that moat if you like comes from the collection in itself and where to go.
When I look at some of the valuation, I tried to justify this narrow moat that I’m trying to excuse myself in so many ways by saying that this is a company that’s probably not going to grow a lot. It has in the past and it has also not taken the same beating as you see many other retailers have lately.
Whenever you look at the bottom line, and even the profits, it’s been shrinking. It’s been a bit of a pain here during the pandemic even though 2020 is still going to be a profitable year, but it still sustains their top line and they’re still making other decent profits.
I find a double digit return for a company like Foot Locker. If I just say flat growth, I come up with 12.5%, I think you definitely can make the argument that it can be hard enough in itself, especially over the coming year. But that is my pitch for the inaudible of value investing picks right now.
If I had to throw it back to you what, whenever I’m pitching these stocks and I don’t want to put words in your mouth, but it often comes down to Preston saying, “Dude, we’re in a new world. Stop doing that.”
Toby would say, “I really liked the valuation and the cash flows on that one.” So I’m very curious to see how this discussion is going to go.
Tobias Carlisle
Yeah, so that’s roughly where I was going to go.
I just have a look at the shares. They’ve been pretty good buying back stock. As a result, the revenue per share has grown pretty well for like the last decade, which I was kind of surprised by. It’s remarkably consistent. I guess they’re engineering some of that growth through buybacks. It’s a surprisingly good business, on its financials. Given what we know about it, it is retail. It’s typically in malls. It’s got a 70% customer, or 70% supply in Nike. Sometimes they get a little bit concerned with something like this. What if their interests become adverse to Nike’s? What happens then?
Does Nike need them?
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