Term Paper on "Foot Locker Financial Analysis Company Evaluation"

Term Paper 10 pages (3016 words) Sources: 4 Style: MLA

[EXCERPT] . . . .

Foot Locker Financial Analysis

Company Evaluation

Originally founded by Woolworth & Company chain in 1974,-Foot Locker is best known as being one of the highest performing subsidiaries of the Venator Group, the name the Woolworth's chain in 1998. As Woolworth's wanted to concentrate more on specialty retailing, which had significantly greater gross margins, the creation of the Venator Group made this strategy more achievable. In 1982 and 1987, Venator launched Lady Footlocker and Kids Footlocker. Based on the success of the Foot Locker chain, the company in 1993 completely redefined their business model to concentrate on specialty apparel and shoes stores. As a result, Venator Group closed 1,400 stores and changed its name to Foot Locker after the divesture.

The Venator Group chose to launch their first step in the Puente Hills Mall in Orange County, California as a test market in 1974. Within the next fi8ve years, 133 stores were added to the chain, and in 1982 Lady Foot Locker was created. The company experienced significant growth throughout the late 1980s, adding up to 867-Foot Locker stores in the U.S. And 244 lady Foot Locker stores as well, Also in 1987 the company opened up a Lady Foot Locker in Germany, marking the company's first expansion into Europe. Foot Locker also acquired Champs Sports and Robby's Sports in 1988. These acquisitions set the stage for the company's growth in Germany and new introduction of the chain to Australia. In 1991 the company acquired Freedom Sports to continue to bild out their retaiol chain in Australia, followed by the acquisition of Eastbay, footwear, equipment and apparel seller in the U.S. In 1998 the company continued its acquisition strategy with the acquisition of 94 Athletic Fitters stores and converted them to the classic Foot Locker retail and merchandising format. In 1999 the company launching footlocker.com quickly realized sales online and this has since grown into an essential part of the company's multichannel strategy.

As the series of acquisitions were successful and the demand in Europe continued to grow significantly, Foot Locker opened its own distribution center in the Netherlands. Acquisitions continued with the purchase in 2004 of the Footaction chain of retailers in the U.S., with a total of 350 locations acquired during this specific purchase. To further expand into Ireland, Foot Locker chose to acquire 11 additional Champion Sports Group stores throughout that nation. During 2004 the company focused on the development of trading agreements in the Middle East, a market that had yet to be developed by the company to this point in their history. Foot Locker invested in a 10-year development agreement with Alshaya Trading Company to launch 75 stores throughout the Middle Eastern nations served through the partnership. Through 2006 the company continued to growth through acquisitions and also with a stronger focus on retail operations, having completed 600 real estate projects in that year, including the opening of 119 new stores and investing in the remodeling of 316 stores. Using financial performance metrics, the company also chose to close 100 under-performing stores as well. During 2007 the company turned its attention to acquiring key parts of their value chain by attempting to purchase Genesco, North American wholesale marketers of footwear, headwear and accessories. Foot Locker offered $46 per share, an offer rejected by Genesco management. A follow-on offer of $51/share was made and this offer was also rejected.

As of April 2008,-Foot Locker has 3,000 stores in the U.S. alone and is one of the largest retailers globally. With over 21,000 shoe stores in the U.S. alone however, Foot Locker appears to have over-built its retail strategy. Further, this retail strategy is concentrated on malls and other traditional high retail traffic locations. The shift in athletic and casual shoe purchasing is increasingly outside of malls in specialty locations, a factor making it more difficult for Foot Locker to react to the market. This market dynamic is also the catalyst for the price competition the chain is experiencing, with competition from the low end of discount sports stores and mass merchandisers including Wal-Mart at the low-end and high-end discount store chains selling premium shoe brands.

Figure 1 graphically shows the challenge Foot Locker faces from the low-end and also from the high-end (Foot Locker, 2007)

Figure 1: Foot Locker is getting caught in the Middle

The two dominant competitors the company faces are Brown Shoe and Payless Shoe Source. Brown Shoe has made significant progress with their IMPACT initiative, which has focused on improving their supply chain, merchandising and allocation of inventory. The IMPACT initiative has earned the company 2.5% increase in gross margins since 2001. Secondly, Brown Shoes' inline initiative shoes.com has nearly doubled from 17.7M to $34.9M in 2007. The company does not specifically report these revenues however they were obtained through SEC filings and Hoovers records (Foot Locker, 2008). The other dominant competitor is Payless Shoe Source, which has successfully targeted the most prolific buying segment of shoe buyers, women who are between the ages of 18 and 49, and have incomes less than $75,000 per year. The company estimates this target demographic purchases one of three pairs from the company's stores further accentuating this segments' loyalty to the brand. Second, Payless has also been the most aggressive in terms of revamping and increasing the intensity of their advertising efforts to the 18 to 49 age segment with Hot Zones and the Fashion Lab. The company has also acquired a specialty marketing firm to assist with these store re-branding efforts, purchasing Collective Lab for $91M.

Financial Performance

Foot Locker faces greater competition and challenges to profitable growth than ever before, as their mainstream retailing strategy has isolated them from higher-growth market opportunities. Table 1, Foot Locker Ratio Analysis, illustrates the three-year trends of profitability ratios, liquidity indicators, and asset management ratios for the last three complete years of data. Starting with the poriftabili8ty ratios, ROE is sliding as the cost of revenues have grown while sales have stayed relatively constant, and the sales per square foot of their stores has not increased significantly in the last three years. As a result, ROE has slide to 10.76 for FY 20o7, sliding from 13.93 in 2005. EBITA as a percentage of Revenue has also slid significantly over the last three years as well. From 10.14 in 2005 to 9.67 in 2007, EBITA as a percentage of Revenue has also been impacted by increasing costs and a stagnant sales growth rate. The acquisitions that fueled profitability throughout the 1995-2001 timeframe has been replaced with significant stagnation of sales and lower sales in key U.S. markets. Of the eighteen ratios calculated, the Interest Coverage shows the company's heavy reliance on debt financing for acquisitions. Growing to 131.67 in FY2007 from 25.33 in 2005, this indicates heavy use of debt in the company and high interest changes on the financing used for acquisitions over the last decade. This is a danger sign for the company's debt rating and is a potential drain on liquidity.

Table 1 provides an overview of eighteen ratios illustrating the company's situation. Taken together the ratios point to the need for higher margin products quickly, including a re-aligning of the retail strategy to potential trim unprofitable stores and re-vamp stores designs to drive up more traffic and increase sales per square foot. The collection of metrics also point to a high level of churn in the shoe-buying public as well. Tables 2, 3 and 4 also provide financial analyses of Foot Locker including Income Statement, Balance Sheet, and Segment Analysis.

Assessment of Industry Performance

The nature of the shoe retailing industry is highly competitive on product designs and new product introductions, in addition to the use of pricing as a competitive differentiator when shoes reach the mature stages of their product life cycles (Sullivan, 20). This is in contrast however to the main reasons why the majority of consumers purchase shoes and that is for their durability, comfort and aesthetics.

As the industry is in a mature lifecycle phase however, the following conditions exist, and are exemplified in the financials including in Tables 1, 2, 3 and 4 of this report covering Foot Lockers' three-year financial analysis. This industry is defined by its highly competitive pricing practices, lower profit margins and relatively low level of technological advancement, even on supply chain processes where significant cost savings could be potentially achieved. Mass merchandisers have also created more pressure of shoe manufacturers to specifically create shows just for their channels. An example of this is when Nike was pressured to create an entirely new line of low-end athletic shoes for Wal-Mart but decided to create NikeID.com instead, an online site for creating custom-configured shoes that match the preferences of individual taste. Mass merchandisers have also created increased pressure on cross-channel promotions and the development of entirely new pricing and product development timelines. Wal-Mart's influence on this market is unmistakable. There is also the development of entire new distribution channels that are increasingly self-service to further reduce labor… READ MORE

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