If analysts and investors planning to attend the annual January investor conferences last week were looking for a few tidbits of information to give them some advance information of the health of the public companies presenting, they didnt have to wait long. Before the first company stepped to the podium at the 6th Annual Consumer Conference hosted by Cowen & Company or the 10th Annual IC XChange Conference, a number of presenting companies issued releases to forewarn the market about impending bad news when fourth quarter results are announced in a few weeks. After a string a very successful IPOs the last few years – M&A deals that netted tidy sums for investors – the sporting goods industry is now outpacing the declines of the broader market.
The pre-announcements last week, coupled with other less public bad news at the conferences, sent the market reeling last week as the Sports Executive Weekly sporting goods industry index (see chart below) fell 6.2% for the week, exceeding the 5.4% decline seen in the S&P 500 index. The Apparel sector was hardest hit, thanks in large part to a 34.3% decline in share price at Under Armour, which issued a late week release that forecast a sharp drop in earnings for the 2008 first quarter.
The trouble was perhaps the most magnified at Under Armour, a Wall Street darling that is fighting to maintain market share in its core business, while taking share from others in newer categories, such as outerwear and fotowear. While Under Armour was not listed as a presenting company at either conference, executives were still at the ICR conference to huddle with analysts and investors about expected 2007 results and the prospects for the success of their Performance Trainer footwear release later this spring. While UA told the market that fiscal 2007 net revenues and earnings are expected to come in “slightly ahead of plan,” they also dropped a bombshell that an aggressive marketing spend in the first half of 2008 may limit earnings per share in the first half of 2008 to a range of 3 cents to 5 cents a share, compared to 31 cents in H1 2007 and the 33 cents per share forecast by the Street.
The marketing spend, which is expected to fit within previous guidance that marketing expenses would represent 12% to 13% of sales in 2008, will include a 60-second TV spot in the upcoming Super Bowl. Management said that, based on the timing of the footwear launch, they would shift a substantial portion of their full year marketing spend to the first half of the year.
For 2007, Under Armour said that, based on preliminary estimates, it anticipates full year 2007 net revenues to increase approximately 40% to an estimated $605 million, exceeding the company's previously provided outlook of $590 million to $600 million. The company also expects 2007 income from operations to exceed the previously provided outlook of $81.5 million to $83 million, resulting in diluted earnings per share of approximately $1.03 to $1.04 for the full year.
However, inventory at year-end is still expected to be in-line with the company's previously provided estimates of a 5% to 10% increase from the balance at the end of the third quarter reported for September 30, 2007. That estimate would put inventories are roughly twice the level of inventories at year-end last year. The company also said that it expects 2008 revenues and income from operations will exceed the long-term growth targets of 20% to 25% for each.
The news wasnt all bad last week though as Dicks Sporting Goods once again exhibited impeccable timing and pre-announced that they would exceed expectations for fiscal 2007.
The retailer saw the writing on the wall after a few other retailers hinted at a tough retail environment and took the preemptive move on Monday to increase its fourth quarter guidance from a previous estimate of approximately 59 cents per diluted share to a range of 60 cents to 61 cents per diluted share. Management also said they expect to “at least” meet the most recent comp store sales guidance that called for an increase of approximately 2.0%, or approximately 2.5% adjusting for the shifted retail calendar, compared to a 2.0% increase in the 2006 fourth quarter.
However, the news coming out of Hibbett Sports at ICR was of the negative variety as the retailer warned that it would report a mid-single-digit comp store sales decrease for the fourth quarter through February 2. HIBB said diluted EPS are expected to be approximately 20 cents to 26 cents, compared with 39 cents per share in the prior-year 14-week period and previous diluted EPS estimates of 36 cents to 44 cents per share. The EPS guidance assumes on a low-single-digit comp store sales increase on a calendar basis or a mid-single-digit comp gain on a fiscal basis.
Hibbett is laying out its plans for 1,500 doors, up from the 692 expected by year-end. About 100 stores are within a 15 minute driving distance of a big box. HIBB leases are between $10 and $11 per square foot on average. Approximately 30% of Hibbett stores are mall-based and the other 70% are strip-based. Management said the main focus this year will be expanding stores on the strip format, with at least 90% of new stores located in strip centers.
The initial investment in a strip center store is about $180,000, net of accounts payable and landlord allowance. Sales are approximately $130 to $135 a square foot in the first year. New stores are expected to have a positive contribution to the company in the low-double-digits and return roughly 43%.
