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Ciura: Try on Foot Locker for Size

Retailer has ample opportunity for multiple expansion, Real Money columnist Bob Ciura says.

It’s no secret that building a robust investment portfolio is based on the theory that the best companies make the best portfolio additions.

“Blue chips are those companies that are industry leaders, setting themselves apart from the competition,” said TheStreet’s Bob Ciura in Real Money this week.

“One name that should be considered by both value and income investors alike is Foot Locker, Inc.  (FL) - Get Foot Locker, Inc. Report,” he wrote on Real Money. “Not only is Foot Locker a blue-chip company, it’s also our favorite company in the fashion and clothing industry. Something that should never go out of fashion is buying stocks with excellent potential for future gains."

Why buy FL at its current price of $48 per share - but down 21% over the past 90 days? for Ciura, the numbers tell the story.

--- Foot Locker reported earnings results for the second quarter on Aug. 20. Revenue grew 9.5% to $2.3 billion. Adjusted earnings per share of $2.21 compared extremely favorably to adjusted EPS of $0.71 a year earlier. the company topped expectations on both the top- and bottom-line.

--- Comparable same-store sales were higher by nearly 7%.

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“With strength like this, it's not surprising that gains were seen nearly everywhere,” Ciura said. “Kids Foot Locker and Champs Sports both produced double-digit growth rates, which were made even more impressive as these channels had double-digit growth in the same period a year ago. Footwear and apparel also stood out in performance.”

Foot Locker is also expected to post $7.15 of adjusted EPS in full-year 2021, which would be a 154% increase compared to 2020 and a 45% improvement from 2019 if achieved. The company also has a compound annual growth rate of just 4.6% over the last decade. However, this includes last year's Covid-19 impacted results. Looking at the prior 10-year period, EPS had a CAGR of 16.2%.

“With the shares trading around $46, Foot Locker has a price-to-earnings ratio of just 6.4,” Ciura said. “We think that a valuation of 12 times earnings, near the long-term average, is appropriate for the stock. This implies a massive tailwind from multiple expansion. If the stock were to trade with our target multiple by 2026 then valuation would add 13.4% to total returns.”

FL’s dividend story stands up, too.

“Prior to last year, Foot Locker had nearly a decade of dividend growth,” Ciura added. “However, the company was forced to suspend and then cut its dividend during the worst part of the pandemic. Prior to last year, the dividend had a 10-year CAGR of nearly 10%. Though the dividend is not yet back to pre-pandemic levels, Foot Locker has raised its dividend twice in 2021. We believe that the dividend will surpass its previous mark in the very near future. The shares yield 2.6% today, twice that of the S&P 500 index.”

In total, Ciura expects annual returns of 19% per year through 2026.

Get more trading strategies and investing insights from the contributors on Real Money.