Kaushik Andra, Ishan Prasad, Shicheng Tang, Lingtao Zhou

April 25, 2013

Introduction Macroeconomic Review Industry Overview Company Overview Financial Analysis Valuation Recommendation

Founded in 1974- Headquartered in New York, NY

Global Retailer of athletically inspired shoes and apparel

Operates 3335 retail stores in 23 countries in North America, Europe, Australia, and New Zealand

Source: Marketline

Marketplace Fairness Act moving through Senate◦ Primarily affects small online retailers

Retail Sales down in March but beat expectations for 1st quarter◦ May be explained by payroll tax effect◦ Further sequestration cuts

Source: Wall Street Journal

Growth in Asian markets slow as well, Japan trying to implement expansionary monetary policy

European data continues to show mixed results, points to sluggish growth◦ Austerity measures in Spain not particularly

effective

Source: New York Times

Foot Locker primarily operates in the retail athletic shoe wear and apparel industry

Largest Players: Nike, Adidas, Finish Line, Dick’s Sporting Goods

Asia Pacific region forecasted to have highest growth during next 5 years

Bargaining Power of Buyers- High◦ Consumers face low switching costs

Bargaining Power of Suppliers- Moderate◦ Suppliers starting to develop e-commerce presence

Threat of Substitutes- Moderate◦ Can use cross-training shoes for various purposes

Barriers to Entry- Low◦ Low initial investment to enter retail space

Degree of Rivalry- High◦ Emergence of online retailers in every business segment

Overall Industry Attractiveness- Moderate

Highlighted by events such as FIFA World Cup 2014, and 2016 Olympics◦ CAGR of 4.92% until 2017

Mainly correlated with global economic growth ◦ Heavily driven by consumer sentiment and

confidence◦ Foot Locker specifically affected mostly by U.S

and European growth

Source: Lucintel

Operates in two reportable segments — Athletic Stores and Direct-to-Customers.

Athletic Stores segment is one of the largest athletic footwear and apparel retailers in the world, whose formats include Foot Locker, Lady Foot Locker, Kids Foot Locker, Champs Sports, Footaction, and CCS.

Direct-to-Customers segment includes Footlocker.com, Inc. and other affiliates, which sell to customers through their websites, mobile devices, etc. It operates websites for eastbay.com, ccs.com as well as those aligned with the brand names of its store banners

Source: Foot Locker Inc. 2012 Annual Report

Source: Foot Locker Inc. 2012 Annual Report

• Sales increased 9.0% in 2012, as compared with 10.7% in 2011.

• Excluding the effect of currency fluctuation, it increased by 10.6% in 2012, as compared with 8.9% in 2011.

Source: Foot Locker Inc. 2012 Annual Report

Most divisions experienced strong increases compared with the prior year, led by Champs Sports and domestic Foot Locker.

Foot Locker Europe had a modest comparable-store sales decline reflecting the macro conditions in that region.

Introduced a new banner SIX:02 in November 2012.

Source: Foot Locker Inc. 2012 Annual Report

Sales increased 19.7% in 2012, as compared with 18.8% in 2011.

The increase was majorly a result of strong sales performance for the company’s store-banner websites (60%) as well as increased Eastbay sales.

Source: Foot Locker Inc. 2012 Annual Report

Source: Foot Locker Inc. 2012 Annual Report

Create a clear customer focus, to drive performance in core athletic banners.

Make stores and internet sites more exciting, relevant places to shop and buy.

Deliver exceptional growth in high-potential business segments.

Aggressively pursue brand expansion opportunities

Source: Foot Locker Inc. 2012 Annual Report

Source: Foot Locker Inc. 2012 Annual Report

Strengths•Leading athletic footwear and apparel retailer in US.•Wide selection of products focusing on different customers’ needs.•Strong profitability and liquidity

Weaknesses•Sales highly correlated to Nike’s performance.•Reliance on relationship and performance of vendors.

Opportunities•Increasing online shopping.•Growing demand for women’s athletic footwear.•Expansion into international markets

Threats•Highly competitive environment.•Shift in fashion trends.•Changes to labor regulations and increased wages.

Source: Foot Locker Inc. 2012 Annual Report

Source: Foot Locker Inc. 2012 Annual Report

2012-2013 2011-2012 2010-2011Profitibility

ROC 17.00% 12.99% 8.39%ROE 17.70% 13.45% 8.51%ROA 12.40% 9.35% 5.92%

LiquidityCurrent Ratio 3.70 3.79 3.96Quick Ratio 1.50 1.55 1.42

Debt to Equity 5.60 6.4 6.77

Working CapitalInventory Turnover 3.70 3.6 3.37

A/P Turnover 15.78 16.57 16.23

Source: Bloomberg

Metric ValueCurrent Stock Price

$32.34

Trailing P/E

12.53

Forward P/E

10.43

Dividend Yield

0.8 (2.5%)

Market Cap

4.86B

Source: Yahoo.com

Source: Yahoo

Source: Foot Locker Inc. 2012 Annual Report

Foot Locker Inc.              

                                      

Enterprise Value / PriceLTM LTM 2014E LTM LTM 2014E TBV EPS

Company Sales EBITDA EBITDA EBIT EPS EPS LTM Growth   

Foot Locker Inc. 0.7x 5.6x 5.2x 6.7x 4.9x 11.8x 1.53x 11%   

Comps                  Finish Line Inc. 0.5x 4.6x 4.7x 5.5x NA 11.6x 0.96x 15%Genesco Inc. 0.5x 5.6x 5.0x 7.5x 2.4x 10.4x 4.03x 15%DSW Inc, 1.1x 8.7x 8.1x 10.5x 19.6x 18.0x 6.73x 14%Dick's Sporting Goods Inc. 0.9x 8.2x 7.3x 10.2x 20.2x 16.4x 7.56x 16%Dillard's Inc. 0.7x 5.6x 5.4x 8.4x 8.4x 11.3x 0.92x 10%

 Mean 0.8x 6.5x 6.1x 8.4x   12.7x 13.6x 4.04 14%Median 0.7x 5.6x 5.4x 8.4x   14.0x 11.6x 4.03 15%

Mean $ 36.49 $ 37.52 $ 37.75 $ 40.15   $ 35.53 $38.01 $ 52.55  Median $ 32.82 $ 33.09 $ 33.83 $ 40.01   $ 39.29 $32.67 $ 52.42  

Mean                 $ 39.56 Median                 $ 37.51

Source: Bloomberg

Source: Bloomberg

Strengths◦ Strong Same-Store Sales Growth◦ Good improvement in operating margins◦ Excellent Dividend Record◦ Revamp store layout to better suit customer shopping

experience

Concerns◦ Consumer sentiment sluggish as global economy

recovers◦ High degree of rivalry within industry with the rise of

online retailers◦ Unclear plan of expansion into key global markets

Valuation Summary◦ Current Stock Price: $32.34◦ Comparable Companies Valuation: $39.56◦ DCF Valuation: $26.95

Recommendation: WATCH LIST◦ Place on RCMP Watch List◦ Consider reviewing again in 12 months once U.S.

and European economies show stronger consumer confidence