Option Trade 
Foot Locker, Inc. (NYSE:FL) Calls
  Tuesday, February 21, 2017

** OPTION TRADE: Buy the FL MAY 19 2017 72.500 call at approximately $3.00. Place a pre-determined sell at $6.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.20.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

Foot Locker, Inc. (NYSE:FL), a retailer of shoes and apparel, is slated to release fourth-quarter fiscal 2016 results on Feb 24. The current Consensus Estimate for the quarter under review is $1.31, reflecting a year-over-year increase of over 12%. However, the Consensus Estimate has increased by a penny in the past seven days. Analysts expect revenues of $2,116 million, up about 5.4% from the year-ago quarter.

In the trailing four quarters, the company outperformed the Consensus Estimate by an average of 2%.

The most recent quarter was the 27th record breaking quarter for them, and they seem to do a very good job of managing inventory, since sales rose 5% while inventory only grew by 1.9%. Also, their direct to consumer channel is showing strong growth of 8.9%, which reduces the potentially negative impact of the Amazon effect.

The company continues to show strength in a number of their categories, particularly in the women's and children's footwear categories.

Guggenheim Securities Chief Executive Dick Johnson believes that the ongoing questions about mall traffic and assumptions about Foot Locker’s inability to continue to produce healthy operational results have provided an attractive entry point on the shares for long-term investors.

They upgraded Foot Locker to Buy from Neutral, and increased their 2018 EPS estimate to $5.75 from $5.70 and establishing an $85 price target, based on 15 times their new 2018 EPS estimate.

Guggenheim upgraded the shares for four main reasons:

  • 1) shares are down 14% from 52-week highs versus the S&P 500/S&P Retail Index (RLX) down about 1%;
  •  2) they believe ongoing concerns on mall traffic are overblown as it relates to Foot Locker as it has demonstrated a lack of dependence and proved to be a standout destination in a rough neighborhood;
  • 3) at current levels shares are trading at a 12% discount to its three-year average two-year forward price/earnings multiple and trading at a double-digit discount on a relative valuation to the S&P 500; and
  •  4) while concerns linger around the slowdown at Under Armour (UAA), Foot Locker’s merchandising prowess positions it well to continue to utilize numerous vendors to deliver impressive results.

Foot Locker, Inc. has a 1-year low of $50.90 and a 1-year high of $79.43. The firm’s 50 day moving average is $69.94 and its 200 day moving average is $68.78. The firm has a market cap of $9.40 billion, a price-to-earnings ratio of 15.33 and a beta of 0.57.

Influencing Factors to Consider               

Foot Locker's stellar performance is backed by effective implementation of operational and financial initiatives. It is believed that the company is likely to gain by constantly utilizing opportunities like kids' and women's business, shop-in-shop expansion in collaboration with its vendors, store banner.com business, store refurbishment and enhancement of assortments.

Further, the company is focusing on augmenting eCommerce platform, growing direct-to-consumer operations, margin expansion and tapping underpenetrated markets.

Foot Locker will continue to be a top wholesale partner for Nike (NKE), Adidas, Under Armour and Puma, among others, driving continued mid-single-digit comparable-store sales/high-single-digit to low-double-digit EPS growth.

Foot Locker’s diverse portfolio of banners, globally, as well as its “House of Brand’s” approach provides insulation from a choppy North American retail environment (about 70% of sales in U.S.).

Foot Locker has an ability to generate ongoing positive traffic in its U.S. mall operations, and it is believed that Foot Locker banners remain a top mall-based destination.

The athletic footwear category has demonstrated pricing power, when the right price/value is presented.

Additionally, a return to growth in Nike Basketball in the coming quarters should facilitate ongoing comp performance at Foot Locker.

The financial performance has been quite consistent and predictable at Foot Locker. They have grown sales at a reasonable clip of just over 6% CAGR and have grown earnings at about 20% CAGR since 2010. At the same time, they have paid down debt consistently, suggesting that there is little risk of a liquidity crisis at the firm.

Analysts and Hedge Funds Opinions

Tyvor Capital LLC bought a new stake in shares of Foot Locker, Inc. during the fourth quarter, according to its most recent disclosure with the Securities and Exchange Commission. The firm bought 131,415 shares of the company’s stock, valued at approximately $9,316,000. Foot Locker accounts for 3.8% of Tyvor Capital LLC’s investment portfolio, making the stock its 12th largest position. Tyvor Capital LLC owned approximately 0.10% of Foot Locker at the end of the most recent reporting period.

Canaccord Genuity reissued a “buy” rating and issued an $83.00 price objective (up from $79.00) on shares of Foot Locker in a research note on Monday, December 5th.

A number of other brokerages also recently weighed in on the stock…..

  • B. Riley reissued a “buy” rating and issued an $81.00 price objective on shares of Foot Locker in a research note on Thursday, November 24th.
  •  Vetr raised shares of Foot Locker from a “hold” rating to a “buy” rating and set a $77.33 price objective on the stock in a research note on Thursday, December 22nd.
  • Brean Capital reissued a “buy” rating and issued a $77.00 price objective (down from $78.00) on shares of Foot Locker in a research note on Tuesday, November 22nd.
  • Finally, Wedbush reaffirmed an “outperform” rating and set a $80.00 price objective on shares of Foot Locker in a research note on Friday, December 2nd.

Foot Locker has received an average rating of “Buy” from the twenty-three research firms that are currently covering the stock. One investment analyst has rated the stock with a sell rating, five have issued a hold rating, sixteen have assigned a buy rating and one has assigned a strong buy rating to the company. The average 1 year price target among analysts that have covered the stock in the last year is $76.37.

Harvey’s Options Volatility Indicator

Conclusion

The company has demonstrated its ability to diversify in what has been a softer basketball environment over the prior few quarters. With momentum at Adidas and Puma after several successful launches, the company has numerous opportunities to continue to diversify its product offering.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

 ** OPTION TRADE: Buy the FL MAY 19 2017 72.500 call at approximately $3.00. Place a pre-determined sell at $6.00.

Note: No protective stop losses added -- but if you wish to do so make it $1.20.


 ”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!

Options traders are not successful because they win.

Options traders win because they are successful.

 

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