Renowned footwear and athletic apparel manufacturer Nike, Inc. (NKE) reported stellar earnings for its fiscal fourth quarter on June 24, reflecting an impressive recovery from last year’s pandemic-driven lows. NKE’s revenues increased 96% year-over-year to $12.30 billion in the fiscal fourth quarter, ended May 31. Its net income and EPS came in at $1.50 billion and $0.93, respectively, demonstrating a substantial improvement from negative year-ago values. The stock of the Beaverton, Ore., concern jumped more than 12% in after-hours trading on the day of its results release. However, we think NKE is significantly overvalued. Its respective 4.79 and 29.96 forward Price/Sales and Price/Cash Flow ratios compare poorly with 1.34 and 14.17 industry averages.

Meanwhile, footwear and accessories manufacturer Foot Locker, Inc. (FL) has emerged as one of NKE’s major competitors, with impressive growth potential. The New York City company’s revenues increased 83.1% year-over-year to $2.15 billion in its fiscal first quarter ended May 1. Its net income and EPS improved significantly from negative year-ago values to $202 million and $1.93, respectively. FL’s shares have gained 50.1% year-to-date, while NKE returned 7.7% over this period. And in terms of their past year performance, FL is the clear winner with 108.2% gains versus NKE’s 55.4% returns.

Analysts expect NKE’s revenue and EPS to increase 11.6% and 19.1%, respectively, year-over-year in the current year. FL revenues and EPS, in comparison,  are expected to improve 13.5% and 101.8%, respectively, in the current  year. We think FL’s impressive growth trajectory NKE’s makes it well positioned to deliver relatively higher returns in the near term.

Here’s what could shape FL’s performance in the coming months:

Impressive Capital Allocation and Deployment

FL has increased its capital expenditure budget by 77.4% year-over-year to $275 million for 2021. The company plans to strengthen its digital capabilities to enhance its customer experience and  streamline its global supply chain. 

Also, FL increased its quarterly dividend payouts by 33% to $0.20 in the first quarter of its fiscal year 2021. The company’s Chairman and CEO Richard Johnson said, “These actions demonstrate our board of directors’ confidence in resuming higher levels of investment into the business as we continue to build our strategic omni-channel position at the center of youth culture, while also returning more cash to shareholders through a significant dividend increase.”

On December 8, 2020, FL approved a short-term shareholder rights plan that is valid for one year to protect shareholder rights and interests in the event of a tender-based hostile takeover.

FL repurchased 620,544 shares in its fiscal first quarter, ended May 1, 2021, for approximately $34 million. In addition,  the company invested $51 million to expand its store fleet, digital platforms, supply chain and logistics capabilities, and other infrastructure. It opened 12 new stores in the most recent quarter, bringing FL’s total stores to 2,952 across 27 countries.

Favorable Growth Outlook

An $8.57 billion  consensus revenue estimate  for the current year represents  a 13.5% improvement year-over-year. Furthermore, FL’s revenue is expected to rise marginally next year.

The Street expects the company’s EPS to rise 40.8% in the current quarter (ending July 2021), 101.8% in the current  year, and 4.2% next year. Also, FL’s EPS is projected to rise at a 34.1% CAGR  over the next five years. The company has an impressive earnings surprise history; it surpassed  consensus EPS estimates in each of the trailing four quarters.

Discounted Valuation

In terms of non-GAAP forward P/E, FL is currently trading at 10.7x, which is 37.1% higher than the 17.01x industry average. Its 0.56 non-GAAP forward PEG ratio  is 55.6% higher than the 1.27 industry average of 1.27.

Also, FL’s 0.77 forward Price/Sales and Price/Cash flow multiples of 0.77 and 11.84, respectively, compare with 1.35 and 14.33 industry averages.

Consensus Rating and Price Target Indicate Potential Upside

Of the 15 Wall Street analysts that rated FL, 10 rated it Buy while five rated it Hold. Their $71.8012-month median price target represents  an 18.3% potential upside from yesterday’s closing price of $60.71. Their price targets range from a low of $60.00 to a high of $82.00.

POWR Ratings Show Promise

FL has an overall A rating, which equates to Strong Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

FL has an A  grade of A for Value and Sentiment, and B for Quality. The stock’s discounted valuation and impressive growth potential justify its  Value and Sentiment grades. Additionally, FL’s trailing-12-month 24.24% ROE is 104.2% higher than the 11.87% industry average. This justifies the Quality grade.

Of the 34 stocks in the A-rated Athletics & Recreation industry, FL is ranked #1.

In addition to the grades highlighted, we have also rated FL for Momentum, Stability, and Growth. Click here to view all FL Ratings.

Click here to view the top-rated stocks in the Athletics & Recreation industry.

Bottom Line

FL is one of the biggest up-and-coming companies in the athletic footwear and apparel space. The stock is relatively cheaper than  industry giant NKE. In terms of non-GAAP forward P/E, FL is currently trading at 10.7x, which is 69.8% lower than NKE, which is currently trading at 35.41x. Furthermore, FL’s relatively higher revenue and earnings growth potential we think makes it a better investment option.

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