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Foot Locker Is the Retail Dividend You Need This Holiday Shopping Season

Shares of Foot Locker (NYSE: FL) have erased their autumnal rally after the sneaker retailer shared its 2019 third-quarter update. There was nothing wrong with the results. On the contrary, the report card was a good one, in line with an implied second half of 2019 rebound prediction management presented a few months ago. The issue was with the all-important holiday shopping season guidance, which is lapping a particularly strong comparable-sales gain of 9.7% in Q4 2018.

Still, in a world where manufacturers like Nike are favoring direct-to-consumer sales via the internet and their own branded stores, Foot Locker still has value. Backed by a company that is profitable and returning cash to shareholders, this is a retail dividend stock worth considering.

The outside view of a recently opened Foot Locker store in a mall in Malaysia.

A recently opened Foot Locker store in Malaysia. Image source: Foot Locker.

Q3 by the numbers

Third-quarter sales grew 3.9% year over year to $1.93 billion, driven by a 5.7% increase in comps at existing stores from a strong back-to-school shopping season. As a result of better profit margins, adjusted earnings per share soared 19% higher to $1.13.

Added to the first half of the year, it's shaping up to be a decent run for Foot Locker in spite of the sluggish start to 2019.

Metric Nine Months Ended Nov. 2, 2019 Nine Months Ended Nov. 4, 2018 Increase
Revenue $5.78 billion $5.67 billion 2.1%
Gross profit margin 32.1% 31.6% 0.5 pp
SG&A expense $1.22 billion $1.16 billion 4.9%
Adjusted earnings per share $3.32 $3.16 5.1%

PP = percentage point. SG&A = selling, general, and administrative. Data source: Foot Locker.

In other third-quarter news, Foot Locker took a minority stake in youth culture e-commerce start-up NTWRK, launched an investment incubator called Greenhouse aimed at funding disruptive artists and creators, and continued to open new stores in emerging markets like Southeast Asia and the Middle East. Sneaker culture is alive and well and expanding across the globe, and though direct-to-consumer selling platforms are on the rise, Foot Locker still holds a powerful niche as a curator of cool shoes.

An impressive cash return policy

It wasn't the third-quarter results that gave investors pause but rather the guidance for lackluster upcoming holiday shopping season results compared with a year ago. Management said that comps growth should be "relatively flat" due to the huge 9.7% surge the company enjoyed during the fourth quarter of 2018. Earnings per share should still notch a mid- to high-single-digit advance, though.

Due to the sluggish outlook, the previous guidance for full-year comps in the mid-single-digit range was reduced to a low-single-digit increase. It's vague language on what to expect, but any hint of a downgrade in today's competitive retail industry, which is still evolving to the digital age, isn't taken kindly by investors.

Nevertheless, Foot Locker is far from being in trouble, as its lowly 9.4 price-to-free cash flow (money left over after operating and capital expenses) valuation might suggest. That extra cash is getting returned to shareholders, too. Through the first three quarters of the year, Foot Locker has used $300 million to repurchase shares, good for nearly 7% of its total shares outstanding. Paired with its dividend (currently yielding 3.7%), the shoe purveyor has returned $425 million to investors this year -- not bad.

With Foot Locker making slow but steady progress, its cheap valuation and solid dividend still have my attention. Fourth-quarter guidance could have been better, but it could have been a lot worse. The pessimism seems overdone to me.

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Nicholas Rossolillo and his clients own shares of Foot Locker. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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