Surprising Stock To Like In Athletic Shoes

As anyone who has ever watched a line form outside a shoe retailer ahead of the release of a limited edition of designer sneakers knows, the athletic footwear business is doing quite nicely, thank you. As NPD Group, a consulting firm, reported early this year, 2012 saw sales of athletic footwear in the U.S. alone grow 4% to $13.8 billion, and while this year’s results have been uneven – up 3% in some weeks, down as much in other weeks – the business is still generating some appealing investment ideas, as well as suggesting that there is at least one company out there to avoid.

The biggest bargain of the lot seems to be Foot Locker (FL), a big retailer of both running and basketball shoes for both adults and children, both of which are posting above-average growth rates. The shoes they sell may be pricey – ready to pay $270 or so for a teal- or salmon-colored pair of Nike Lebron XPS basketball shoes or $200 for the latest Mizuno running shoes? – but the stock isn’t, trading at a trailing PE ratio of 12.6 and 12 times forward estimates, while its same-store sales growth approaches 8%, beating the industry average. That’s significantly less pricey than at least two of the main publicly-traded ‘pure plays’ amongst the shoe manufacturers, including Nike (NKE), as well as key retailing rival, Finish Line (FINL).

FL Forward PE Ratio Chart

FL Forward PE Ratio data by YCharts

There are many reasons to gravitate to athletic shoe retailers rather than invest in the shoe manufacturers themselves. In the eyes of at least some investors, Nike – especially at its current valuation – is a stock to be wary of as its growth in newer markets, such as China and Brazil, has flagged. The company admitted, on reporting an impressive 22% jump in its profits for the fiscal fourth quarter in late June that it has had to change the design and even the fit of its shoes to make them appeal to Chinese consumers, and that a China recovery will take some more time. For the worrywarts, owning a retailer like Foot Locker gives them exposure to the market seeing the most reliable and stable growth – North America – while at the same time not having to bet on the success of any single brand. Even better, Foot Locker can pull in customers by offering its own brand, which can’t be found anywhere else.

FL Gross Profit Margin Quarterly Chart

FL Gross Profit Margin Quarterly data by YCharts

If your own inclination steers you in the direction of the retailing group, Foot Locker appears to be a better bet than The Finish Line, whose same-store sales grew only 2.4% in its most recent quarter. The latter’s valuation is higher – a trailing PE ratio of 16 – and its growth rate in both revenues and profits is less impressive. Finish Line has an agreement in place to open stores within Macy’s (M) department stores – part of the latter’s own strategic overhaul – but for now, that pact is causing a spike in capital spending that offsets some of the gains the company has reported from sales of its basketball shoes and other gear. Moreover, while Foot Locker traditionally stocks more basketball-related shoes and other items, Finish Line tends to be more skewed toward serving runners, and demand in that segment of the market is dipping slightly.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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