The athletic footwear sales trends out this week have investors nervous. At first glance the deceleration is notable, but a closer look at recent trends suggest that the turn is in areas that are significantly under-represented at FL/FINL. Our interpretation of the data is that trends remain strong where it matters. We think this is a solid buying opportunity for both FL and FINL on perceived weakness in trends.
There are multiple ways to parse the weekly/monthly footwear sales results to gauge underlying trends at footwear retailers like FL and FINL. The two that have proven most indicative of underlying trends that we track most closely are:
- Looking at the monthly data by channel which separates Athletic Specialty sales from the Department Store (KSS, JCP, etc) and Shoe Chain (BWS, DSW, etc.) channels that have been underperforming, and…
- Tracking our own Performance vs. Non-Performance footwear index. This analysis has yielded the more notable callout.
Simply put, performance categories (Running, Cross Training, and Basketball) which account for ~75% of athletic footwear sales and where FL and FINL are over-indexed are materially outperforming non-performance categories (Boots, Casual, Hiking, etc.).
Recall on the FL’s 3Q earnings call in mid-November, the company reported month-to-date comps up +MSD despite industry sales down -6% according to the weekly data. Over the past two years, the spread between Performance footwear vs. Total Athletic footwear has been somewhere between 5-to-10pts and currently stands at the upper end of that range. This spread can be clearly seen in the following charts below. As our proprietary index suggests, underlying Performance footwear sales are still running up +HSD (high-single-digit). What’s accounting for the industry sales deterioration is the Non-Performance index, which is largely sold through the Department/National Chain channel.
The bigger question for us is whether weakness in these non-core categories can be so sustained and pervasive such that they can carry through to the Foot Lockers of the world. We think we’d need to see months of that type of trend to pose this risk. We simply not there, but the market is starting to discount that it will come to fruition.
The bottom-line is that we think weakness in both FL and FINL reflect investor concerns based on underwhelming industry sales data without accounting for the critical distinction between Performance and Non-Performance categories. As such, we think this recent weakness is an great buying opportunity for both FL and FINL.
Our estimates remain above the Street for both names. On FL, we’re 6% above consensus EPS for 4Q with a +8% comp, and are looking at $3 in earnings power next year approaching $3.50 in F14. We still think this one is in the early stages of its turnaround and see more opportunity for upside earnings performance over the intermediate-term.
On FINL, we are in-line with Street expectations in the upcoming quarter and year where we think upside in earnings is limited due to current investment spending, but are shaking out +5% and +8% ahead of consensus in 2013 and 2014. At 9.5x our 2013 estimate, we think setup for earnings growth next year is not reflected at current levels.
Both FL and FINL are among our top long ideas behind NKE, FNP and RH.