Foot Locker (FL)

It reports Friday. Peers Nike and Under Armour are moving a lot of product, after all. Maybe. However, he prefers Nike for its direct-to-consumer.

(A Top Pick Oct 3/16. Up 14%.) *Short* At the end of the day, all retailers are going to suffer the same fate from the Amazon (AMZN-Q) affect. A cheap stock, but a bit of a value trap. He covered his Short on the earnings disappointment, but would look to re-Short if it bounced materially from here.

This has free cash flow growth. Against their competition, they have actually been doing quite well. You’re getting a 10-year growth rate and CapX at 50%, cash from operations of 110%, and dividend growth of 184% over the last 10 years. The free cash flow has grown at about a 3^rd over that time frame. A brick-and-mortar company that knows what they are doing.

*SHORT* The challenge is that their biggest customer is Nike (NKE-N), about 70% of their business. Nike is making a very strong push direct to the consumer, a lot of it through the e-commerce program. Footlocker has got their #1 customer reducing their emphasis on mall and store sales. Their competitive response is that they’ll either have to find other suppliers, which costs money, or develop their own the e-commerce business. For them to make the necessary investments in either case, their cost of sales is far too low. This Short is for the next 2-3 years. Dividend yield of 1.63%.

This is 75% Nike distribution, but Nike has an online platform now where you can order customized running shoes online. This is a terrific Short here, and thinks it is going substantially lower.

(A Top Pick June 26/13. Up 50.71%.) Sold his holdings when it hit his target. They have been able to remodel their stores to achieve better economics. Expanded in Europe through an acquisition. Thinks there is still upside on this. He would be looking to enter again on a pullback.

Would Christmas be the catalyst to move the share price up? Had a disappointing quarter and the stock traded down to a level where he aggressively added more. Likes the athletic trends and their exposure to it. This area will continue to grow and improve with new exciting products. Mainly exposed to running and basketball, which are 2 trends that have been driving the growth of the shoe market. Well managed company that focuses not just on store growth, but on fixing up stores that don’t work and the return of capital. Generating 12%-15% returns on all the stores they are fixing. Expecting a reacceleration of earnings going forward. Trades at 12-13 times earnings. $1 billion of cash on the balance sheet and doesn’t know what to do with it.

Extremely cheap trading at less than 12X earnings. This is a $6 billion company with $1 billion of cash on hand. There are 2 things that could happen. They could actively start using the cash themselves to buy back stock and increase dividends and if they don’t do it, somebody else could come along and help them do it. Continues to look positive in the athletic product cycle of basketball and running. Yield of 2.33%. Target price of $37-$40.