Module 9- Foot Locker, Inc.

1. Module 9-Foot Locker, Inc. Taylor Blaney

2. Sporting Goods Stores Industry • Overview • Sporting goods stores sell sporting equipment typically from outside goods manufacturers • Goods in the industry range from camping equipment to basketball hoops to shoes • Annual Revenue for the sporting goods industry is over $42 billion and annual growth is steady around 2.5%-3.5% however the number of companies is slowly declining

3. Foot Locker Overview • Global retailer of athletic shoes and apparel • Located primarily in North America, Europe, Australia, and New Zealand • Largest retailer of athletic shoes in the U.S. • Nearly $6.2 billion in sales in 2012 (73% within U.S.) • Develops few products, mostly supplied by a few top-end product manufacturers • Operate in two ways: • Athletic Stores • Direct to Customers

4. Foot Locker in the Industry • Market share-11.2% • No threat of acquisition • Reasons for growth • Recent consumer confidence has lead to growth in shoe sales • Exclusive contracts with suppliers • Growing Online Retail • Adolescent Demographic • Largest buyer of basketball shoes in U.S.

5. Valuation of Equity • Two formulas can be used to determine the equity value per share • Must separate out the debt to find out estimated equity value • To find estimated stock price divide equity valuation by common stock outstanding

6. Effect Change in WACC and Growth have on estimated stock price

7. Effects • Increase in WACC causes stock price to increase slower with growth and decrease faster with less growth • The lower WACC allows growth to have a greater effect on stock price as it increases • Lower WACC also lowers the effect on stock price that decreases in growth have

8. Sensitivity Analysis of Enterprise Value • Shaded is where you should sell, not shaded regions should either buy or hold

9. Analyst Forecast • Can use the analyst forecasts for dividend growth and earnings per share growth to determine future stock price • Two models • One focuses on the dividends and earnings per share as they effect book value • The other focuses on residual earnings

10. Dividend forecast model • Takes analyst estimate of dividend growth in the short term to determine a forecast of what an investor would receive if they liquidate their investment at the forecast horizon • Information needed:

11. Dividend Model

12. Conclusions • Share price investor receives at horizon: $44.81 • This amount is an increase from the $37.89 estimated current amount • Utilized this equation to determine the price: • Must compare this price with price determined from residual earnings model

13. Residual Earnings Model • Growth rate of 2% was assumed for this model • Need to take earnings determined from dividend model an calculate the book value per year to find horizon stock price

14. Residual Earnings Model • Residual earnings model determines the earnings per year and calculates a growth % to determine if a stead state of growth has occurred • Utilizes this equation to determine the horizon stock price:

15. Model

16. Conclusions • Residual earnings model returned a horizon price of $44.54 • This is also an increase from the current determined stock price • Signifies that a buy recommendation is a good possibility

17. More Conclusions • Current estimated stock price is $37.89 • Estimated stock prices from dividend and residual earnings models: $44.81 and $44.54 • These horizon stock prices seem to indicate that a steady state is close to being reached • Cannot take these as set prices because of the analyst bias to be optimistic in their reports • Current stock price is $45.84 • This is most likely due to updated information, 10K comes out in next 2 weeks

18. Other • No mid year or adjusted valuations were done due to the fact that new information will be coming out very soon • These estimations would cover more than 12 months time and be very speculative