Top picks 2012: Foot Locker

by Chuck Carlson, editor The DRIP Investor

There’s a nice turnaround story building at Foot Locker (FL). This specialty retailer, after struggling in 2007, 2008, and 2009, has put together five solid quarters of better-than-expected profit growth.

The stock has responded to the operational improvement, with these shares moving to their highest level since 2006 before pulling back to their current price.

Solid operating momentum, a cash-heavy balance sheet, and an attractive yield of nearly 3% are just a few of the attractions of these shares.

While these shares have demonstrated above-average volatility in the past, I like the direction of the company and the stock and view these shares an attractive play for more aggressive investors.

Foot Locker is a specialty athletic retailer that operates approximately 3,400 stores in 22 countries in North America, Europe, Australia, and New Zealand.

Store brands include Foot Locker, Footaction, Lady Foot Locker, Kids Foot Locker, Champs Sports, and CCS retail stores. The firm also offers direct-to-customer channels, including footlocker.com, Eastbay, and CCS.com.

Foot Locker has been fine-tuning its operations to much success in recent quarters. The firm has posted seven consecutive quarters of sales and profit growth.

Driving the gains have been improved same-store sales. Same-store sales in the second quarter rose nearly 12% and were up more than 7% in the third quarter. Foot Locker has been pruning under-performing outlets.

Total stores operated have declined nearly 6% over the last two years. Running fewer, more profitable stores has increased the firm’s efficiency in terms of capital use. That, in turn, has boosted the financial position.

At the end of the fiscal third quarter, the firm had $698 million in cash assets, or roughly $4.50 per share, and $136 million in long-term debt.

The strengthened financial position has been used to buy back stock. The firm has repurchased some $97 million worth of its stock this year as part of a $250 million share repurchase program.

The cash-heavy financial position, coupled with the improved earnings, generated a 10% dividend increase earlier this year, and I wouldn’t be surprised to see a similar increase sometime in 2012.

Foot locker trades at less than 13 times fiscal 2012 ending January profit estimate of $1.77 per share. While not a bargain-basement valuation, it is reasonable given the company’s sales and earnings momentum.

The yield of nearly 3% provides added appeal and is a nice complement to the above-average capital-gains potential I see for these shares over the next 12 months.

Please note that Foot Locker offers a traditional dividend reinvestment plan in that investors must be a shareholder of at least one share — and have the share registered in their own name, not the “street” name — in order to participate in the plan.

Learn more about this financial newsletter at Chuck Carlson's The DRIP Investor.