While it appears at first glance that the Sporting Goods sector in our Q3 Retailer Performance Report (see page 11) outperformed the other sectors in net income growth, one only has to look at the extremely poor return on sales in the sector and its clear that its better to be in Specialty — and focused on apparel.
The Sporting Goods group returned less than one percent of sales as net income in the most recent quarter measured while the mall guys in the Specialty sector delivered roughly 8.7% back in profits for the quarter. The Mid-Market boys saw net income come in at an average 3.2% of sales.
True, the Sporting Goods group is in a bit of an upheaval with the transition with TSA and Gart, but when we measure the sector using TSAa own $4.4 million operating profit number for the quarter that excludes integration costs, the group still only returns 1.5% in net income. If we exclude the perennial loss leader, GSI Commerce, the return on sales number only moves up to 1.8% of sales.
Obviously, lower margins in hardlines and higher Occupancy and SG&A costs associated with the bigger boxes, will have an impact on the numbers, but we would expect the Sporting Goods sector to grow margins through increased sales in apparel with their floor space. Most of these guys are roughly 50% equipment.
Hibbett has the formula right and doesnt have the big drag from high rents and employee costs and manages to drive a higher percentage of sales in footwear and apparel. The result is a sector-leading 6.9% return on sales driven in part by a 310 basis point increase in gross profit margin.
Still the 132% growth in earnings in the sector (312% excluding TSAs integration costs) dwarfed the still-impressive 12.1% sales gain for the Sporting Goods group.
The Specialty guys really spiked profits in the quarter, outpacing sales growth by a 4:1 ratio. While the almost 32% gain in profits for the sector seems less impressive than the Sporting Goods number on a percentage basis, the group added almost $33 million in profits in the quarter versus just $9.0 million in Sporting Goods.
The Specialty group got a nice lift from Foot Locker, which added more than $17 million in profits during the quarter, but also served as a drag on return on sales, with a still-very-respectable 5.2% return for the quarter. The Finish Line delivered 6.5%, while the apparel guys, PSUN and The Buckle, delivered back 8.7% and 10.1%, respectively.
>>> Its clear that higher apparel numbers drive profits for everyone. Its a mystery why more retailers havent embraced sportswear as an avenue to a greater return…