A big fish taking big action after scoring big on a previous buy is going to draw big time attention. Czech billionaire Daniel Kretinsky has bought shares in a pair of retailers that have suffered thanks to COVID 19. He bought Macy’s, Inc. (M) back in May when the department store mostly traded in the mid $5s. (1) A month later, the young billionaire reportedly sold Macy’s, making $36 million as the stock popped 65%. (2)
Kretinsky was back at it last week, eyeballing and buying another retailer. This time around he bought a little more than 2 million shares of Foot Locker, Inc. (FL) for a total investment of $76.4 million. (3) All those shares make the Czech the top Foot Locker shareholder.
In case you don’t know, Foot Locker is an athletic footwear and apparel retailer. The company sells athletic footwear, apparel, accessories, and equipment under Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Eastbay, Footaction, Runners Point, and Sidestep brand names.
Kretinsky’s buying spree comes at a time when Wall Street analyst Errin Murphy is negative on the stock. Murphy recently downgraded the retailer to “Underweight” (a polite way to say sell) from “Neutral” (a more nuanced way to say sell). (4) The Piper Sandler analyst is worried that growing COVID counts could harm the retailer’s holiday quarter and cut her Foot Locker price target to $25 from $29. Other Wall Streeters are mixed on their FL views.
They both can’t be right, can they? Let’s take a look at Foot Locker’s prospects to see who is likely to win this tug of war of opinions.
The street says Foot Locker will produce consensus earnings per share of $4.33 next year, fiscal year 2022. That’s considerably higher than this year’s forecast of $2.88. Meanwhile, the 24 covering the athletic retailer predict sales of $8.02 billion next year, up from $7.63 billion. (5)
Foot Locker appears underpriced relative to its peer group based on its forward price to earnings and price to sales (P/S) ratios. As we type, the stock is trading at $41.67 (close of business on 12-4-2020) and at 9.62 times 2021 projected earnings per share (EPS). The average peer is valued at 16.67 times next year’s guesstimates. Meanwhile, FL current P/S ratio is 0.59 compared to the industry’s 0.74.
In the last half-decade, investors paid an average of 11.54 times Foot Locker’s profit per share. If the company hits the 2022 target of $4.33 and trades at the typical, five-year P/E, then it would trade at $49.96. The highwater mark P/E for the sneaker seller since 2015 is 16.11, giving the stock potential upside to $69.77.
On the sales front, Foot Locker traded at an average price to sales ratio of 0.78 for the past five-years. Using 2022’s revenue estimate of $8.02 billion and the typical P/S value, we get a price of $59.93.
Outlook: it’s possible for both Murphy and Kretinsky to be right. Based on Foot Locker, Inc.’s (FL) earnings consensus for next year and its usual P/E, the stock could underperform the overall market while still generating a small profit by percentage for the billionaire buyer.
Shorter term, we agree with Murphy that COVID’s impact on Foot Locker is a huge question mark for the Christmas shopping season. So big, management didn’t provide holiday quarter guidance (6) during their most recent quarterly checkup.
Experience says patience might be the right virtue with FL. The stock has rallied sharply since the COVID crash and is a nose under its 52-week high. A tough quarter in the all-important holiday shopping season would likely be a major negative for the retailer’s stock price in the next six to eight weeks. Of course, better than expected results and shares head high. Nonetheless, we live by the axiom a mentor shared a long time ago, “it’s better to be out of a stock wishing you were in than in a stock wishing you were out.”
Advice to invest by.
1 – https://therealdeal.com/2020/05/12/czech-sphinx-makes-big-bet-on-macys/
2 – https://therealdeal.com/2020/06/11/czech-billionaire-cashes-macys-shares-after-less-than-a-month/
3 – https://www.secform4.com/insider-trading/850209.htm
4 – https://finance.yahoo.com/news/piper-sandler-highlights-continued-foot-204149475.html
5 – https://finance.yahoo.com/quote/FL/analysis?p=FL
6 – https://www.thestreet.com/investing/foot-locker-beats-q3-profit-forecast-holds-back-on-guidance