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I think that FL’s current positioning mirrors where it was in 1. It came out a dark period, looked expensive all the way, and the stock still tripled. Timing and sizing are key.
  • You’ve seen us put up our inventory/margin roadmap charts – and FL recently checked in to the ‘sweet spot,’ where sales growth is outpacing inventory growth, and margins are positive. Yes this is a great place to be – but that’s especially the case for Foot Locker.
  • I’m hard pressed to find any retailer that has spent so much of its history in a negative inventory position and simply living in a world of swapping margin for comp. In fact, the only two I can find are Sears and K-Mart when they were stand-alone companies (and now the combined entity, of course).
  • But when things turn positive, they stay there for more than a quarter or two. Looking at FL’s 10-year trend, it was in a negative inventory/sales position 90% of the time. But the one time it came out of its funk was in mid-99 through the end of 2000. This was also after a 2-year period of fashion shifting away from athletic, the Asian currency crisis, and overcapacity at retail – not unlike what we have today.
  • During the time period where its income statement and balance sheet synched in the ‘sweet spot’, FL’s stock went from $5 to $16 – and yes, it appeared expensive every step of the way.
  • I’m not suggesting we ignore valuation, as there are plenty of issues that have yet to be resolved. One of the biggest is dynamics in Asia and flow through to the US (we’re published a ton on this, and I still think that FL can triple margins from here in that context). Also, 3Q is an easy compare, but less so than what was just reported, and less than what we’ll see in 4Q.
  • My confidence level remains high. This is a question of timing and sizing.
Tough to read, I know. But showing the 1 period vs today is vital.