Hot on the heels of Black Friday’s robust sales reports, footwear retailers Foot Locker (NYSE:) and Finish Line (NASDAQ:) were greeted Monday morning with analyst upgrades. And their shares are up a whopping 10% and 6%, respectively, in midday trade after , while .
These moves are exciting for investors who bought the shares last week, but beware because the footwear retailing industry, while big, is shrinking. According to
, 2011 revenues will total $20 billion, but that would be 5% below its 2010 level. Underlying that decline is a slow economy. And industry profitability is capped by the sheer variety of rivals — including mass merchandisers, discount stores and nontraditional retailers that are selling products that are mostly commodities.
that Foot Locker is the industry leader with 18.7% market share, while Finish Line is much smaller: It has 660 stores — a mere 19% of Foot Locker’s 3,426.
Foot Locker’s recent financial performance has been good. It earned — four cents above expectations — when it reported third-quarter 2011 results on Nov. 17. Thanks to sales of running shoes, Foot Locker was able to report its seventh consecutive quarter of results that beat. Sales of $1.39 billion grew 9% — a big improvement in a declining industry.
But Finish Line also reported better-than-expected earnings on even faster sales growth. Its second-quarter 2012 were a penny ahead of the Zacks consensus estimate. And Finish Line’s sales were up 10.1% to $331.5 million due to high back-to-school demand, bigger transactions and online sales that climbed 61%.
So here’s what the investment choice between Foot Locker and Finish Line boils down to:
- Foot Locker: growing strongly, narrow margins; cheap stock. Foot Locker sales have risen 4% in the past 12 months to $5.5 million, while its net income spiked 260% to $254 million — yielding a low net margin of 4.6%. Its price-earnings to growth ratio (where a PEG of 1.0 is considered fairly priced) of 0.97 is cheap on a P/E of 13.1 and expected earnings growth of 13.5% to .
- Finish Line: growing, decent margins; expensive stock. Finish Line sales have increased 4.8% in the past 12 months to $1.3 billion, while net income has increased 35.5% to $74 million — yielding a slightly wider 5.9% net profit margin. Its PEG of 1.62 is expensive on a P/E of 14.7 and expected earnings growth of 9.1% to .
Foot Locker wins this investment foot race, thanks to a more reasonable valuation. But given its wider margins, I would consider Finish Line if it can speed up its earnings growth.
Peter Cohan has no financial interest in the securities mentioned.
