Foot Locker, Inc. (NYSE:FL) shares are down more than -55.66% this year and recently decreased -4.56% or -$1.5 to settle at $31.43. Skechers U.S.A., Inc. (NYSE:SKX), on the other hand, is down -0.77% year to date as of 10/12/2017. It currently trades at $24.39 and has returned -2.09% during the past week.
Foot Locker, Inc. (NYSE:FL) and Skechers U.S.A., Inc. (NYSE:SKX) are the two most active stocks in the Textile – Apparel Footwear & Accessories industry based on today’s trading volumes. To determine if one is a better investment than the other, we will compare the two companies’ growth, profitability, risk, return, and valuation characteristics, as well as their analyst ratings and sentiment signals.
One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect FL to grow earnings at a -0.11% annual rate over the next 5 years. Comparatively, SKX is expected to grow at a 13.00% annual rate. All else equal, SKX’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. , compared to an EBITDA margin of 8.6% for Skechers U.S.A., Inc. (SKX). FL’s ROI is 23.50% while SKX has a ROI of 17.70%. The interpretation is that FL’s business generates a higher return on investment than SKX’s.
Earnings don’t always accurately reflect the amount of cash that a company brings in. FL’s free cash flow (“FCF”) per share for the trailing twelve months was -0.18. Comparatively, SKX’s free cash flow per share was +0.93. On a percent-of-sales basis, FL’s free cash flow was -0.29% while SKX converted 4.14% of its revenues into cash flow. This means that, for a given level of sales, SKX is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. FL has a current ratio of 5.60 compared to 3.10 for SKX. This means that FL can more easily cover its most immediate liabilities over the next twelve months. FL’s debt-to-equity ratio is 0.04 versus a D/E of 0.04 for SKX. FL is therefore the more solvent of the two companies, and has lower financial risk.
FL trades at a forward P/E of 7.84, a P/B of 1.43, and a P/S of 0.54, compared to a forward P/E of 12.39, a P/B of 2.13, and a P/S of 1.01 for SKX. FL is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. FL is currently priced at a -24.77% to its one-year price target of 41.78. Comparatively, SKX is -24.84% relative to its price target of 32.45. This suggests that SKX is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.50 for FL and 2.00 for SKX, which implies that analysts are more bullish on the outlook for FL.
Risk and Volatility
Beta is an important measure that gives investors a sense of the market risk associated with a particular stock. A beta above 1 signals above average market risk, while a beta below 1 implies below average volatility. FL has a beta of 0.69 and SKX’s beta is 0.03. SKX’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment.FL has a short ratio of 3.17 compared to a short interest of 3.36 for SKX. This implies that the market is currently less bearish on the outlook for FL.
Skechers U.S.A., Inc. (NYSE:SKX) beats Foot Locker, Inc. (NYSE:FL) on a total of 7 of the 14 factors compared between the two stocks. SKX is more profitable, has higher cash flow per share, has a higher cash conversion rate and has lower financial risk. In terms of valuation, FL is the cheaper of the two stocks on an earnings, book value and sales basis, SKX is more undervalued relative to its price target. Finally, COH has better sentiment signals based on short interest.