Unpleasant Surprises Could Be In Store For Foot Locker, Inc.'s (NYSE:FL) Shares

It's not a stretch to say that Foot Locker, Inc.'s (NYSE:FL) price-to-sales (or "P/S") ratio of 0.3x seems quite "middle-of-the-road" for Specialty Retail companies in the United States, seeing as it matches the P/S ratio of the wider industry. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Foot Locker

What Does Foot Locker's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Foot Locker's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Foot Locker will help you uncover what's on the horizon.

How Is Foot Locker's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Foot Locker's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 7.4% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 7.1% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 1.9% each year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 6.7% per year growth forecast for the broader industry.

With this in mind, we find it intriguing that Foot Locker's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Foot Locker's P/S Mean For Investors?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Given that Foot Locker's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 1 warning sign for Foot Locker that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.