Foot Locker shows Mr. Market is insane
Foot Locker Inc. (NYSE: FL) exposes the total insanity of today’s stock market.
Foot Locker’s share price almost doubled over the past year, as its actual value stagnated. Mr. Market paid $28.40 for Foot Locker on 17 August 2020 and $54.06 on 17 August 2021.
In contrast, Foot Locker’s total assets grew from $6.796 billion on 30 April 2020 to $7.44 billion on 30 April 2021. An increase of around $644 million or a growth rate of less than 10%.
Is Foot Locker growing?
However, I calculate Foot Locker’s quarterly revenues grew by $977 million in the pandemic year. The quarterly revenues rose from $1.176 billion on 30 April 2020 to $2.153 on 30 April 2021.
Stockow estimates Foot Locker’s quarterly revenues grew by an extraordinary 83.08% in the quarter ending on 30 April 2021. Conversely, Foot Locker’s quarterly revenues shrank by -43.41% in the quarter ending on 30 April 2020.
Thus, much of Foot Locker’s “growth” is playing catch up. I doubt the growth can continue if it returns to post pandemic levels. Remember, the Retail Apocalypse is still out there and the great plague known as Amazon (AMZN) is still on the march.
Why Foot Locker cannot compete with Amazon
Notably, Amazon’s quarterly revenues grew from $88.912 billion on 30 June 2020 to $113.08 billion on 30 June 2021. I calculate Amazon’s quarterly revenues grew by $24.168 billion during the pandemic year. Moreover, I consider Amazon, Foot Locker’s primary competitor.
Amazon’s resources also grew during the pandemic year. For example, Amazon’s cash and short-term investments grew from $71.769 billion on 30 June 2020 to $90.159 billion on 30 June 2021. Amazon’s cash grew by $18.39 billion during the pandemic.
Comparatively, Foot Locker’s cash and short-term investments are roughly one 18th of the amount of cash and short-term investments Amazon added in the last year. Therefore, I could not see how Foot Locker (FL) can compete with Amazon (AMZN).
I think Amazon has so much cash it can afford to give free Nike shoes away as a loss leader to lure people to Zappos. Such a giveaway is not as far-fetched as you might think. Amazon already gives free shipping away as part of Amazon Prime to attract customers.
I have to ask if Mr. Market has heard of Amazon? Yes, Mr. Market paid $3,241.96 for Amazon (AMZN) on 17 August 2021, yet he does not understand what Amazon is.
Amazon.com’s net global sales were $120.968 billion in 2020, ecommerceDB estimates. They estimate that number could rise to $162.360 billion in 2021. I just cannot see how Foot Locker can compete with that behemoth.
Is Foot Locker Making Money?
Foot Locker (NYSE: FL) made more money over the last year. For example, Foot Locker reported a quarterly gross profit of $704 million and a quarterly operating income of $282 million on 30 April 2021.
Those numbers are growing. For instance, the quarterly gross profit rose from $277 million on 30 April 2020. Similarly, the quarterly operating income rose from -$105 million on 30 April 2020.
Importantly, Foot Locker’s quarterly income and quarterly profit exceed pre-pandemic levels. For instance, Foot Locker reported a quarterly operating income of $176 million and a quarterly gross profit of $700 million on 31 January 2020.
Similarly, the quarterly operating cash flow rose from -$116 million on 30 April 2020 to $398 million on 30 April 2021. In comparison, the quarterly operating cash flow was $299 million on 31 January 2020.
Meanwhile, the quarterly ending cash flow rose from $163 million on 31 January 2020 to $1.047 billion on 30 April 2020 to $2.001 billion on 30 April 2021. Hence, Foot Locker’s quarterly ending cash flow grew by over $1 billion, during the pandemic.
Thus, perhaps Foot Locker has recovered from COVID-19. Cynics, however, will wonder if inflation drives these numbers.
What Value Does Foot Locker have?
Importantly, Foot Locker (FL) borrowed little money during the pandemic.
It reported a quarterly financing cash flow of $288 million on 30 April 2020. However, Foot Locker reported a quarterly ending cash flow of -$332 million on 31 July 2021. Hence, Foot Locker paid off the borrowing a quarter later.
Consequently, Foot Locker’s total debt fell from $3.623 billion on 30 April 2020 to $3.161 billion on 30 April 2021. Thus, Foot Locker finished the pandemic with less debt, more cash, and some additional value.
Thus, many people will argue Foot Locker is a value investment. I disagree because I think Foot Locker has a low margin of safety.
I think Foot Locker’s margin of safety is low because the revenues fell by 43.41% in the quarter ending on 30 April 2020. Thus, Foot Locker’s business can vanish fast, which makes it an unreliable investment.
A Respectable Dividend Stock
Yet investors can make money from Foot Locker. Notably, Foot Locker paid a 20¢ dividend on 30 July 2021. That dividend grew from 15¢ on 30 October 2020. Thus Foot Locker pays a growing dividend.
Overall Foot Locker delivered a 70¢ Last Twelve Months dividend and a 1.23% dividend yield on 13 August 2021. Consequently, I consider Foot Locker (FL) a respectable dividend stock. However, investors need to be careful with Foot Locker because it could collapse.