Trapeze Asset Investor Letter: Sticking With Foot Locker (FL), Bails on Dicks (DKS)

Trapeze is bullish on Foot Locker, Inc. (NYSE:FL), though like many other investors, it was shocked by the sudden about-face from the company’s management regarding its second-half performance. After initially forecasting second-half growth in the low-single-digit range, Foot Locker pulled the carpet out from investors during a sobering second-quarter earnings calls. Comps fell by 6% year-over-year during the quarter and the company was forced to alter that previous forecast to a second-half earnings decline of 20% to 30%. Trapeze is nonetheless hanging with the stock, anticipating positive comps in 2018 on the back of innovative product launches, though it did lower its FMV on the stock to $45 from $70. Foot Locker currently trades hands at $34.41, with shares down by over 51% this year.

Trapeze revealed that it sold off its position in Dicks Sporting Goods Inc (NYSE:DKS), citing the fact that the stock had fallen below its TRAC floor. Shares of Dicks have plummeted by 48% this year, as like Foot Locker, it forecast a dire second-half of the year. As RBC Capital noted, consolidation within the sports equipment and apparel industry, including the bankruptcy of Sports Authority, have lead to an unpredictable pricing environment in the sector, as well as elevated inventories (Dicks’ total inventory was up by 11.8% at the end of Q2). Wider distribution of key brands and heightened promotion from competitors are also putting greater pressure on Dicks.

Trapeze has a $95 FMV on Dollar Tree, Inc. (NASDAQ:DLTR), which is currently trading at $89.42, having surged by 35% since early-July. Trapeze sees Dollar Tree as having a big opportunity to capitalize on the shoddy nature of many Family Dollar (which it bought in 2015) locations by improving their standards. Trapeze sees the potential for both a big boost to earnings (federal corporate tax cut) and potential hazards given the company’s heavy debt load of $7 billion (changes to interest rate deductibility).

Disclosure: None