Foot Locker (NYSE: FL) is the largest retailer of athletic footwear and apparel in the world and operates approximately 4000 athletic retail stores in 18 countries in North America, Europe and Australia.

The products are sold under the brand names of Foot Locker, Footaction, Lady

Foot Locker, Kids Foot Locker, and Champ Sports. Foot Locker, through its Footlocker.com and Eastbay business operates a direct to customers business of athletic footwear, apparel and equipment. FL is also developing plan for a value-priced family chain and franchises in the Middle East.

Recent Events
Foot Locker recently reported its Q4 2006 results, and its shares have declined around 3%, as Wall Street estimates have moved lower to reflect FL's revised guidance. The reduced guidance may be a cautious approach by management as there are several catalysts that could propel FL shares higher.

The profit margins in Europe, primarily the United Kingdom, have cost FL around $0.30 in earnings in the last two fiscal years. Management has stated that in the current fiscal year the trend in profit margins in Europe has been very encouraging. A stable profit margin in this geographic segment can propel earnings for the full year.

FL is also making strategic acquisitions in its rapidly growing Brown Shoe category which encompasses FL's new value-priced family format, Footquarters. This format sells moderately priced Brown at $30-35/pair. Half the broad based merchandise mix will be geared toward women, with 25% men, 20% children and 5% accessories making up the rest of the mix.

Foot Locker has also announced a new partnership with Nike that will provide it with an exclusive Nike product, providing some competitive advantages in its mall-based retail stores.

Financial Outlook
Although earnings growth this year will not be spectacular, FL will have impressive second and third quarters, its most prominent earnings quarters. Year over year gains will be 35% and 23% respectively. Although current Street estimates for the full year have FL essentially flat at $1.62/year. Longer term, full year 2008 earnings estimates are for $1.65/share. The resumption of growth over the next 24 months or so will be FL's rollout of Footquarters with 70 units in 2007, 200 in 2008 with the eventually of having over 600 units over time.

On a valuation basis, FL trades at around 13 times earnings, a PEG ratio of 1.07 and 0.63 P/S. As the catalysts for growth are realized, FL should sell in excess of 15 times earnings. In addition, FL is trading with a dividend yield of 2.10%. FL also trades at just around 5.5 times EBITDA. While the stock was rumored to be up for sale for a while now, management put those rumors to rest during November of 2006. While the company may not be for sale, its underlying fundamentals are appealing to value investors and funds.

The Bottom Line
The shares of FL are down over 20% from its 52 week high. Since management has reduced guidance and put to rest sell out speculation much of the down side risk in already in the stock. Although, profit margins have been an issue for the past two years, they may have finally stabilized. With the new company initiatives, the potential catalysts could lead to several quarters of positive earnings surprise.

The company is the dominant player in the athletic shoe retail world. It has a solid balance sheet and strong cash flow. FL recently announced an increased stock buyback authorization which is equivalent to about 9% of the company's outstanding shares.

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