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What Do Hedge Funds See in Foot Locker Inc (NYSE:FL)?

Foot Locker Inc (NASDAQ:FL) is a $5 billion market cap shoe retailer with nearly 3,400 stores which ranks in the top ten apparel store stocks among hedge funds. Ken Griffin’s Citadel Investment Group increased its FL holdings in the first quarter of 2012 to 4.5 million shares, after essentially initiating its position in the last quarter of 2011 (see more stock picks from billionaire Ken Griffin). First Pacific Advisors, a fund managed by Robert Rodriguez and Steven Romick, has been reducing its stake but still owned 2.4 million shares according to its 13F filings (find out what else the fund was invested in). In all, 27 hedge funds had positions in the stock, putting it well ahead of larger apparel companies such as Limited Brands Inc (NYSE:LTD).


The hedge funds with positions in Foot Locker Inc have been well rewarded this year, with the stock up 36%. The company has beaten analyst earnings estimates each of the last four quarters, and now analysts are putting out projections that give the company a forward price-to-earnings ratio of 12.4. This is a reasonable multiple for a growing consumer stock, and one that is not overexposed to the consumer economy: possibly because of a focus on mainstream shoes rather than more premium merchandise or other, more discretionary apparel. Its beta is approximately 1. This does not mean that Foot Locker is insulated from potential low growth in the U.S. but it does indicate that it is a safer bet than other consumer companies. In addition, Foot Locker pays a 2.2% dividend yield, which should be at least somewhat attractive to some investors.

FL’s rise so far this year has come off of solid fundamental performance. In the company’s first fiscal quarter ending April 30, same-store sales were up 9% from the first quarter of 2011 resulting in record Q1 EPS despite a decrease in the number of stores and selling square footage dropping by 3%. The rise in net income against the same quarter in the previous year- 38%- nearly matches the rise in the stock price this year. Both of the company’s operating segments grew their revenues, though the overwhelming majority of Foot Locker Inc’s business comes in its Athletic Stores division compared to its Direct-to-Customers division.

Foot Locker has a number of comparable peers. The closest comparable is Finish Line Inc (NASDAQ:FINL), whose market cap of $1 billion is considerably smaller than FL’s but who is in the business of shoe retail. Finish Line’s recent performance has not been strong compared to Foot Locker’s, though Finish Line Inc sells at a cheaper price multiple. Its forward P/E multiple is 11, and its multiple based on trailing earnings is only 13. Finish Line does pay a lower dividend yield, at 1.1%, but other than that it might make a better value investment. Finish Line has underperformed Foot Locker in the public markets this year, up only 6%. The Gap Inc. (NASDAQ:GPS) is an example of a broader apparel retailer with a larger market capitalization, but does not seem attractive as a value investment compared to FL. Its multiples are slightly higher than Foot Locker’s, it is slightly more exposed to the broader market with a beta of 1.2, it has had a lower growth rate recently (including a decline in earnings in its first quarter compared to the previous year) and it pays a slightly lower dividend yield of 1.7%. We believe that either of the shoe retailers are better buys for investors than the opportunities that can be found in general apparel. Finish Line Inc. and The Gap Inc, as well as Limited Brands, join Foot Locker on the list of top ten apparel store stocks among hedge funds.

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