Sneak Up On These Retailers (FINL, FL)

by: GroovyStocks posted on: November 10, 2005 | about stocks: FINL / FL

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Today we are going to look at two related stocks, Foot Locker (FL) and The Finish Line (FINL), both sneaker retailers. We are looking at this pair in tandem because of the clear similarities and distinctions between the two stories.

We see in Finish Line a clean balance sheet ($120M in cash, $0 debt, $798M market cap), industry leadership (#2 domestic athletic footwear retailer with 5% market share, larger store formats vs. competitors), historical year over year results (grew sales annually from $240M in 2/96 to $1,167M in 2/05), room for growth (opening new stores, recently launched clothing chain), insider ownership (18.6%), a little insider buying (last two insider transactions were buys for over $214K together), and a dividend to boot (only 0.6% but when was the last time you saw a company with this kind of growth and no debt pay a dividend?). Surprisingly you can buy all this for a trailing PE of 13.05, a forward PE of 11.99, and an EV/EBITDA of 5.26.

Moving on to Foot Locker, we see a clean balance sheet ($360M in cash, $348M debt, $3.14B market cap), industry leadership (#1 domestic athletic footwear retailer with 20% market share), diverse insider buying (click here for details), and a respectable 1.5% forward dividend yield. The valuation here is also attractive with a trailing PE of 11.92, a forward PE of 10.20, and an EV/EBITDA of 5.34.

Common between the stories is the industry niche, clean balance sheets, and reasonable valuations. The biggest difference is size, with FL having a market cap about 4x that of FINL. Buy Foot Locker and you have the #1 competitor in the niche (with #2 far behind) and the pricing power it enjoys. Buy Finish Line and you benefit from growth, especially in the form of new stores and the recently launched clothing chain.

Reservations to look into include historically low multiples applied to both stocks, dependence on Nike, and current consumer spending fears stemming from high gas prices and rising interest rates.

Also, the economics of the industry are not especially attractive: no barriers to entry, lots and lots of competition, difficult to distinguish your products.

FINL also has a disgusting two-class share structure to allow its founders to hold disproportionate voting rights. That gives us bad vibes about management.

You’ll have to decide whether these stocks are actually cheap or if their negative qualities mean that they deserve low multiples.

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