Foot Locker On Solid Ground

FL : NYSE : US$37.16
Target: US$39.00

Foot Locker is an athletic footwear and apparel retailer with over 3,400 stores across North America, Europe, and Australia. The company operates under various banners including Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and CCS. The Direct-to-Customers segment sells athletic footwear and apparel through catalogs and e-commerce websites.

Consumer & Retail — Footwear and Apparel 
Investment recommendation
FL will report Q3 results on Friday 11/22 BMO. We are modeling EPS of 67c on a 3.5% comp vs. consensus at 66c on a 3.6% comp. While we believe basketball continued to sell well, we are cognizant of the disruption to comps the ~120 store remodels likely had. Given the ~50% divergence between industry data and FL comps in 1H13, we are not
anticipating a comp beat despite positive industry data and a strong increase in NKE basketball launches. We hope FL quantifies the Q3 impact from the remodels; if so, we believe investors would look through the disruptions now that this year’s remodel program is complete and the benefits begin to accrue to the company in Q4 and 2014. We thus
maintain our BUY rating and $39 target.
Investment highlights
 While we believe basketball strength continued its momentum with ~14 incremental launches during Q3, running was likely less of a contributor to comps since many of the new releases were distributed on a limited basis. That said, Europe looks to be improving and the RPG acquisition should add ~1-2c to Q3.
 Gross margin expansion is not likely given our expectations for soft apparel trends and IMU pressure from vendors.
 We believe a MSD Q4 QTD comp should be viewed positively,  particularly now that remodels are over, and compares ease.
Our $39 price target is based on 12x 2014E EPS, 6x EBITDA, and DCF.


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