Foot Locker Has Plenty of Game Left Despite Its Recent Dominating Performance

NEW YORK (TheStreet) -- With worse-than-expected results already released by several key retailers, it would make perfect sense if investors were to consider exiting the retail sector altogether. After all, who knows what's around the corner?

That said, it would be a mistake to sell a winner like Foot Locker (FL) solely based on fears about weak retail sales in general. The New York-based athletic gear retailer reports first-quarter earnings Friday before the opening bell, and if my suspicions prove correct, Foot Locker stock will go on a run shortly after the numbers are made public. 

One month or even one quarter's worth of uninspiring consumer spending data mean little for Foot Locker. Athletic-wear is hot right now. And as long as sports remain popular, they will drive growth for brands like Nike (NKE) and Under Armour (UA). And Foot Locker, which carries a large selection of both brands, will continue to prosper.

Think of Foot Locker like a chip company that has its components in all the major smartphone makers. Regardless of which device sells the most, the chip company benefits regardless. In this case, whether Nike or Under Armour prevails in their sneaker/athletic gear battle, Foot Locker benefits. And that's exactly what's been driving the stock, which has a consensus buy rating and an average analyst price target of $69 -- 9% higher than current levels of around $63. And this is even with the stock already up some 13% on the year, dominating the broader averages.

Even more impressive, Foot Locker is crushing the SPDR S&P Retail ETF (XRT), which is up just 3% so far in 2015. And the XRT is home to leading retailers like Amazon.com (AMZN) and Costco Wholesale (COST).

What should stand out here for investors, however, is that despite Foot Locker's outperformance, its shares are still underpriced at just 17 times earnings. That's four points lower than the average stock in the S&P 500. This makes no sense, especially given that the average S&P company does not perform as well as Foot Locker.

This is a company that has beaten analyst's earnings and revenue estimates for 11 straight quarters. Not to mention, during that span, Foot Locker has grown earnings by more than 20% year over year for five consecutive quarters. You would have to go all the way back to the second quarter of 2013 to find the last time Foot Locker missed on earnings. And I'm not betting my money that its streak will soon end.

For the quarter that ended in April, analysts will be looking for earnings per share of $1.23 on revenues of $1.91 billion, translating to year-over-year increases of 11% and 2.5%, respectively. For the full year that will end in January 2016, projected earnings per share of $3.93 would mark a 10% increase, while revenue is projected to be up 3%, reaching $7.36 billion.

What stands out in these projections? Both the quarterly and full-year estimates imply earnings that are growing at more than twice the rate of revenue. This speaks to the focus management has placed on profits, and why the stock has performed so well.

With next year's earnings estimates of $4.35 per share anticipating 11% growth, Foot Locker looks even cheaper, with a forward P/E of 14, three points lower than the average for the S&P 500. In other words, while retail stocks might have fallen out of favor, Foot Locker, which also pays an annual dividend of 1.60%, is one to stash in your portfolio and forget about.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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