Try On Foot Locker Stock For Size

Everyone needs shoes -- but is there enough growth in demand for shoes for you to make a profit investing in shares of retailers such as Genesco (NYSE: GCO) and Foot Locker (NYSE: FL)?

The footwear retailing industry is big and shrinking. According to IBISWorld, 2011 revenues will total $20 billion but that figure will be 5% below its 2010 level. Underlying that decline is a slow economy. And profitability in the industry is capped by a variety of rivals -- including mass merchandisers, discount stores, and non-traditional retailers who are selling products that are mostly commodities.

Foot Locker is the industry leader while Genesco is much smaller. Specifically, IBISWorld estimates that Foot Locker is the industry leader with 18.7% market share while Genesco controls a mere 3.5%. In 2007, Foot Locker made an unsuccessful bid to acquire Genesco.

Foot Locker's recent financial performance has been good. It earned 43 cents a share -- four cents above expectations when it reported third quarter 2011 results on November 17th. Thanks to sales of running shoes, Foot Locker was able to report its seventh quarter in a row of expectations beating results and its sales of $1.39 billion grew 9% -- a big improvement in a declining industry.

But Genesco is growing even faster than its larger rival. Its third-quarter earnings spiked 54% in its Tuesday report -- its EPS of $1.21 were a whopping 25 cents above expectations and its revenues of $617 million were 33% higher and $22 million more than expected due to strong same-store sales growth (up 12%) and Genesco's acquisition of UK shoe company Schuh Group, according to BusinessWeek. 

So here's what the investment choice between Foot Locker and Genesco boils down to:

• Foot Locker: growing strongly, narrow margins; cheap stock. Foot Locker sales have risen 4% in the past 12 months to $5.5 million while its net income spiked 260% to $254 million -- yielding a low net margin of 4.6%. Its PEG (where a PEG of 1.0 is considered fairly priced) of 0.97 is cheap on a P/E of 13.1 and expected earnings growth of 13.5% to $2 in fiscal year 2013.
• Genesco: rapidly growing, narrow margins; expensive stock. Genesco sales have increased 13.7% in the past 12 months to $2.1 billion, while net income has soared 88.1% to $73 million – yielding a narrow 3.4% net profit margin. Its PEG of 1.34  is expensive on a forward P/E of 18.1 and expected earnings growth of 13.5% to $4.18 in fiscal 2013.

Foot Locker wins this investment foot race on a more reasonable valuation. But I would consider Genesco if it keeps up its zooming earnings growth and its stock price falls along with the general market.