Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche


Is Foot Locker Making Money?

If any company is likely to die in the retail apocalypse, it is Foot Locker (NYSE: FL). To explain, Foot Locker is in direct competition with Amazon (NASDAQ: AMZN).

Foot Locker’s main product is shoes and Amazon owns the most visible online shoe; store Moreover, shoes are a product that is easy and cheap to ship.

In aCurrently, Foot Locker operates around 3,576 stores in several countries, Investopedia estimates. Presently, Foot Locker Inc. operates six chains; Champs Sports, Foot Locker, Kids Foot Locker, Footaction, Runners Point, and SIX:02.

Consequently, Foot Locker is the third largest standalone shoe retailer in the United States, Ranker estimates. Hence, Foot Locker’s exposure to the retail apocalypse and Amazon is great. The company owns thousands of stores that sell products, Amazon can easily offer.

Is Foot Locker Dying?

I think Amazon dooms Foot Locker because the company makes a little money from its huge foot print. For example, Foot Locker reported quarterly revenues of $1.774 billion, a quarterly gross profit of $534 million, and a quarterly net income of $60 million on 3 August 2019.

Plus, Foot Locker reported a quarterly operating cash flow of $10 million and a negative quarterly free cash flow of -$26 million on 3 August 2019. In addition, Foot Locker had a negative investing cash flow of -$36 million and a -$158 million on the same day.

Thus, Foot Locker generates little cash from its business. However, Foot Locker had $939 million in cash and equivalents on 3 August 2019. Thus, Foot Locker has some cash.

Unfortunately, Foot Locker’s biggest competitor Amazon reported cash and short-term investments of $41.463 billion, a quarterly operating cash of $9.118 billion, a quarterly free cash flow of $6.475 billion, quarterly revenues of $61.404 billion, a quarterly gross profit of $27.067 billion and a quarterly net income of $2.625 billion on 3 August 2019.

How I wonder can Foot Locker compete with a rival with that level of resources? Moreover, that competitor had 105 million Amazon Prime subscribers in the United States in June 2019, Statista estimates. Notably, Statista estimates the average American subscriber spent $600 on Prime in 2018.

Can Foot Locker cash in on Digital Shoe Sales?

Interestingly, Foot Locker is trying to become an e-commerce company. For instance, Foot Locker launched a new incubator called Greenhouse.

Greenhouse is a think tank that will research, create, and develop digital solutions to increase Foot Locker’s business, Complex Style reports. In addition, Foot Locker is making large investments in digital ventures.

For example, Foot Locker made a $100 million investment in GOAT, Sole Collector reveals. Essentially, GOAT is a digital marketplace for used sneakers.

Foot Locker could use GOAT to sell unsold merchandise from its stores. In addition, Foot Locker, could analyze GOAT sales data to see what sneakers are selling. For example, Foot Locker could change its stock to contain the shoes that sell best online.

Furthermore, Foot Locker invested $2 million in the Pensole Design Academy in January 2019, Forbes reports. Pensole trains shoe designers. Foot Locker and its suppliers will help Pensole students and graduates bring their creations to market. The hope is to offer unique footwear before it appears on Amazon.

Can Foot Locker compete with and Amazon?

Thus, Foot Locker is trying to buy a piece of the digital shoe business. However, it could be too late because Amazon’s shoe business is growing at an incredible rate.

Amazon’s shoe business grew by 18% between 2nd Quarter 2016 and 2nd 2017, Chain Store Age estimates. In addition, Amazon’s shoe business grew by 35% in 2016.

Amazon’s power in fashion could be immense. Statista projects the gross merchandise sales volume of Amazon apparel and accessories could grow to $52 billion 2020. Hence, Amazon could soon be the biggest brand in fashion and footwear.

Specifically, Amazon had listings for 12 million clothing products in September 2018, Coresight estimates. Notably, Amazon has a partnership with Nike (NYSE: NKE) that caused the number of Nike listings on Amazon to fall by 46% between 1st and 3rd Quarter 2018.

To explain, Nike now sells shoes directly through Amazon even though they do not list it as an Amazon seller. In exchange for direct sales, Amazon now polices its listings to keep fake Nike products out of its marketplace. In addition, the Amazon sales of another popular sneaker Adidas grew by 5.1% between February and September 2018.  

Will Amazon Dominate the Shoe Business?

To seal Foot Locker’s doom, Amazon could become both a shoemaker and dominate all aspects of the footwear business.

Amazon’s private shoe label 206 Collective is developing a comfortable low-priced sports shoe similar to Allbirds’ product. The Verge calls 206 Collective an “Allbird clone” and notes Amazon’s shoe sells for just $45.

206 Collective is just the tip of the Amazon iceberg. Incredibly, there were 2,783 unique fashion brands on Amazon in September 2018. Furthermore, the number of Amazon apparel listings grew by 27.3% between February and September 2018, Coresight estimates.

Hence, Amazon is becoming America’s shoe store with calls Foot Locker’s existence into question. Thus, Foot Locker could soon follow its competitor Payless Shoe Source into oblivion. Payless; which once operated stores in all 50 American states, closed its doors in 2019.

Is Foot Locker a Value Investment?

Contrarians will wonder if Foot Locker (NYSE: FL) is a value investment because it makes money even though most people believe the company faces extinction.

My answer is, Foot Locker is a value investment now because it is cheap and pays a good dividend. Specifically, Foot Locker paid a 38₵ quarterly dividend on 18 July 2019. Additionally, Foot Lockers Dividend grew by 3.5₵ in 2019. To explain, Foot Locker paid a 34.5₵ dividend on 17 January 2019 and a 38₵ dividend on 17 April 2019.

Foot Locker is a good dividend stock because it offered eight years of dividend growth, a 3.72% dividend yield, an annualized payout of $1.52, and a payout ratio of 34.1% on 25 September 2019. However, Foot Locker is a risky stock because it operates in a shrinking business and does not make that much money.

Thus, I consider Foot Locker a cheap income stock Mr. Market overprices. To explain, I think the dividend is the only thing propping up Foot Locker’s share price; $40.91 on 25 September 2019. If Foot Locker stops paying a dividend, I predict its share price will drop like a stone.

Therefore, you can hold Foot Locker if you want some cheap dividends but be ready to dump this retailer fast. I think Foot Locker is a lousy investment because it is a company with no future. The brick and mortar shoe business will soon disappear and take Foot Locker with it.

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