Investors recently fled Foot Locker Inc. (NYSE:FL). But investing is a distance race, not a sprint, and current valuations are an attractive entry point for longer-term investors.
Foot Locker recently caught my attention when I went looking for consumer-oriented stocks that should fare relatively well from an improving labor market. The company recently released earnings that met expectations, but only because of an additional week in the period. Absent that week, earnings would have fallen short of expectations. This gave many investors sufficient reason to sell the stock and largely stay away. Shares dropped about 6% on the earnings news and have since hovered in the $32 to $33 range.
Foot Locker Inc. (NYSE:FL) is currently priced at a P/E of about 12.7, which is a considerable discount to the industry average of 19.9 and at the lower end of the stock’s own five-year historical range. With such a price tag, the stock seems like a screaming buy. But investors need to be wary. It is easy to get caught in a value trap, where shares of a stock stay relatively low (at what appears to be an attractive valuation) for a prolonged period of time. And, it is tempting to say that is the case with FL shares. It might be, it might not be. I tend to believe that it is not the case here, as I am optimistic on the company’s performance later this year. There are a couple of reasons for this.
First, management stated that it expected the company to hit double-digit earnings growth this year. Favorable earnings could erase from memory the most recent results. And, as Fool John Macris pointed out, the company increased its dividend and also announced a $600 million share repurchase program over the next three years.
Second, I am modestly optimistic on the labor markets. This is a big-picture dynamic that could lead to upside earnings surprises at many retailers. It is tempting to say that hiring this year will follow the same path that we saw last year. Job creation started off 2012 quite strong, but then the pace of growth fell during much of the spring and summer months, before picking back up again at the end of the year (on a seasonally adjusted basis). Although job growth in January and February this year is slower than what we saw last year, I am hopeful that the current pace will be more sustainable. Improvements in the economy are showing up in other areas, and there is potential for these improvements to provide a boost to hiring. For example, the real estate market continues to show signs of modest improvement, and this should have positive spillovers in other sectors, including the labor market. Further, the government reported on Wednesday that retail sales climbed more than many expected in February, suggesting that the spending habits of the American consumer are faring well given changes in taxes and budget issues in Washington. Thus, I anticipate sustained demand for athletic shoes and apparel, which should provide a nice boost to Foot Locker Inc. (NYSE:FL) business.