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Foot Locker (FL) Exhibits Operational Strength, Risks Remain

Zacks Equity Research

Foot Locker, Inc. FL is one of the most widely recognized names in the athletic footwear and apparel industry. It boasts a strong portfolio of leading brands under a variety of store banners which aids it to target specific markets and effectively meet consumer demand. The company had outlined its long-term financial goals that include attaining sales of $10 billion, sales per gross square foot of $600, operating margin of 12.5%, net income margin of 8.5% and a return on invested capital of 17%.

Management believes that the company can benefit in the long run by persistently capitalizing on opportunities like children’s business, shop-in-shop expansion in collaboration with its vendors, store banner.com business, store refurbishment and enhancement of assortments. International expansion, especially in Europe, is another catalyst. Further, Foot Locker is focused on augmenting its eCommerce platform, growing direct-to-consumer operations, margin expansion and foraying into under-penetrated markets.

Foot Locker posted positive earnings surprise for the second straight quarter, as it reported third-quarter fiscal 2016 results. Sturdy comparable sales performance, cost containment efforts and strategic initiatives helped it to continue registering year-over-year growth in both the top and bottom-line. Management reaffirmed its projection of a mid-single-digit increase in comparable sales in fiscal 2016. Further, it continues to expect double-digit growth in earnings per share for the fiscal year.

However, a competitive retail landscape, fashion obsolescence and foreign currency headwinds remain concerns. Fashion obsolescence involves a sustained focus on product and design innovation. The company’s pioneering position may be hurt by delays in its product launches. Moreover, the weakening of foreign currencies against the U.S. dollar may necessitate the company to either raise prices or reduce profit margins in locations outside of the U.S. An increase in prices is likely to have an adverse impact on the demand for Foot Locker’s products.

Given the pros and cons embedded, the stock currently carries a Zacks Rank #3 (Hold).

Bottom Line

Despite the prevailing headwinds, Foot Locker has exhibited a bullish run in the index in the past six months. We noted that in the said period, the stock has surged roughly 37.5%, comfortably outperforming the Zacks categorized Retail-Apparel/Shoe industry, which witnessed an increase of 8.9%. We believe the stock will continue to rally, which is quite evident from its long-term earnings growth rate of 9.7%.



Stocks to Consider

Better-ranked stocks in the retail sector include Best Buy Co., Inc. BBY, The Children's Place, Inc. PLCE and Burlington Stores, Inc. BURL, all flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Best Buy delivered an average positive earnings surprise of 25.7% in the trailing four quarters and has a long-term earnings growth rate of 11.9%.

The Children's Place delivered an average positive earnings surprise of 36.3% in the trailing four quarters and has a long-term earnings growth rate of 10.3%.

Burlington Stores delivered an average positive earnings surprise of 25.6% in the trailing four quarters and has a long-term earnings growth rate of 19.9%.

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