I take advantage of a widening valuation disparity to switch horses, selling my Genesco at a tidy profit and moving that money into Foot Locker.

Putting The Shoe On The Other Foot

I just got back from a glorious long weekend of mountain biking near Quebec City. The region is turning into a real mountain biking mecca. I’ve had the pleasure now of riding the trails at Sentiers Du Moulins, Empire 47, Le Massif and Bras-Du-Nord and there are still more areas to explore. If you’re into the sport and haven’t had the opportunity to check this area out, you owe yourself a visit.

But just before I left, I decided to make a quick adjustment to the portfolio. With the clock ticking Thursday morning on the agreed upon departure time, I was frantically finishing up my trades. I sold Genesco and moved most of this money into Foot Locker.

With this move, I’ve consolidated my bet on the retail sector into one core position. Lately, it has seemed a little redundant to be holding two US based, footwear retailers in the portfolio at the same time. When I added Genesco to my existing Foot Locker holdings last fall, the impact of covid on the retail sector was still very much up in the air and spreading my bets around seemed warranted. The two stocks have tended to move in tandem over the last 12 months but some recent divergence in their share prices prompted me to take profits in Genesco and double down on Foot Locker instead.

Genesco has been a star performer. I bought it last September for $21.50 and sold it last week at just over $60, almost tripling my money in the process. By comparison, Foot Locker has been a relative laggard, gaining only about 50% over that same time period. Lately, Foot Locker stock has been sliding while Genesco has been holding its own and that has opened up a differential in their relative valuation profiles that I felt was worth capitalizing on.

At current stock prices, Genesco is trading at a p:e of around 12.5 to pre-covid earnings. I’d hardly call that an excessive valuation and there certainly could be more upside to be had with this stock. But Foot Locker is even cheaper, at 9.5 times pre-covid earnings.

Both companies have been doing very well in the face of extremely challenging conditions and both deserve a lot of credit for the way they have handled this crisis. Despite rotating store closures, labour shortages, supply chain disruptions and the need to hit the ground running with their online businesses from a relative standing start, they have both managed to produce remarkably strong earnings. Foot Locker especially put in a stunning first half performance.

Where these companies are headed next is still an open question though. They are not out of the woods yet. We could be in for another winter of discontent as the virus seems to be thumbing its nose at our attempts to vaccinate it into submission. Those supply chain disruptions may really start to bite in the crucial holiday shopping season. Government stimulus payments will start to dry up at some point and there could be a consumer spending hangover effect that takes some of the wind out of the sales of the whole unexpectedly robust retail sector.

These concerns have me on edge. I still want exposure to physical retail because I think with renegotiated rents and with all the new investment and expertise in omnichannel selling gained during the pandemic, physical retail could stage a comeback in the years to come. Values are compelling compared to many other market sectors. So I am happy with my bet on shoe stores. I’m just not sure I need two of them.

Foot Locker I believe has a significantly lower valuation at current stock prices than Genesco does and what I think is a better outlook. It is a larger company and more globally diversified. It’s profit margins heading into covid were double that of Genesco’s and it has held up better during the Amazon onslaught of the last 6 years, which perhaps bodes well for its continued resilience going forward. It is focused on expansion in SE Asia which could be a future growth driver. Over the summer it made two very interesting acquisitions. One is a fast growing non mall-based retailer focused on the Hispanic community and the other is a Japanese based high-end and trend-setting sneaker designer. Both of these acquisitions offer the potential for higher growth and together are anticipated to add about 45 cents to next year’s earnings per share. A minority investment in an online used sneaker reseller that recently secured additional funding at a substantially higher valuation offers another interesting twist on the story.

Foot Locker’s share price has been sliding, along with that of one of its core suppliers, Nike. I believe the recent weakness may be due to news that Nike’s factories in Vietnam are being shut down because of a covid outbreak there. While this could certainly have ramifications in the short term, I don’t believe it affects the intermediate to long-term outlook for either of these companies and may be giving me the opportunity to pick up more shares in a well run leader in the footwear retailing space for a rock bottom price.

So I have taken my profits on Genesco and embraced Foot Locker as my lead play in the retail sector.

Meanwhile, I have finished my Canadian second quarter review and have come up empty handed. A detour into the UK market also failed to produce any results. As a result, I decided to take some of the money from the sale of Teck Resources and Cervus and use it to bulk up my holdings in Enerflex, Linamar and BGSF Inc.  Along with Omnicom and Foot Locker, these 5 stocks now form the backbone of my portfolio, with secondary positions in Casa Systems, Hammond Power, Melcor Developments and Essential Energy Services.

My plan is to review the US market over the coming weeks. I still have some excess cash to deploy and when I am finished surveying the investing landscape, I’ll make a final determination as to exactly how I’m going to allocate my remaining cash reserves. Meanwhile, with the market hitting its usual seasonally turbulent period of September and October perhaps there will be new opportunities that make themselves available.

Full disclosure: I own shares in Foot Locker, Omnicom, BGSF Inc., Casa Systems, Enerflex, Linamar, Hammond Power Solutions, Melcor Development and Essential Energy Services. I do not own shares in Genesco, Teck Resources, Cervus Equipment or Nike.