While the firm isn’t in the business of making shoes, it does correlate to footwear more than retail. During October 2012 to January 2013, FL (over a 21 day period) had a solid and steady correlation coefficient of above 0.9 with footwear, while over the same period had a correlation coefficient ranging from 0.85 to -.35. The take away from this little exercise is that FL trades with the footwear sector and not necessarily in the retail sector (where Wall Street places them). FL’s depressed multiple, with respect to retail, could make invstors perceive FL is of value, but after the exercise above, perhaps it is prudent to compare FL to footwear.
The average forward multiple in footwear is roughly 14.8x and the median is about 13.9x. FL, at 12.6x forward, trades below its industry average and median forward multiple. For good measure, the average forward multiple in retail is 19x. This is a slight discount.
In the performance category of net margins, FL underperforms footwear. 58% of its footwear competition has higher net margins than it. Additionally; FL is below average net margins of 10.2%. FL’s management, however, outperforms the competition. The firm’s ROE is better than 68% of retail and better than half the footwear industry at 17%. Wall Street is expecting ROIC to grow 700 bps by 2014.