EXEC: Active Lifestyle Retail Weathers Rough Second Quarter Waters

Although a few retailers outperformed in the second quarter, big names in the active lifestyle retail space like Foot Locker, Dick’s Sporting Goods and Sportsman’s Warehouse fought through a challenging  quarter amid promotional pressures, retail theft and the consumer’s continued shift away from discretionary purchases.

Among 21 publicly-held retailers with some exposure to active-lifestyle categories that provided full-year guidance, eight retailers, namely Dick’s Sporting Goods, Foot Locker, Target, Tractor Supply, Lands’ End, Shoe Carnival, Burlington Stores and Duluth Trading reduced their guidance for the full year. Another eight  retailers, Academy Sports, Hibbett, Macy’s, Kohl’s, Nordstrom, DSW-parent Designer Brands, Famous Footwear parent Caleres and Journeys-parent Genesco maintained their guidance for the year. Five retailers, including Lululemon, Walmart, TJX, Ross Stores and Boot Barn raised their guidance for the year.

Among the major shortfalls, shares of Foot Locker fell 28 percent on August 23 after the sneaker giant slashed its outlook for the second straight quarter and paused its quarterly dividend. Same-store sales in the second quarter were down 9.4 percent, including a 12.4 percent decline in North America.

Much of the sales decline came from Champs, which comped down in strong double-digits in the quarter on repositioning pain, exacerbating the mid-single-digit decline in the Foot Locker nameplate businesses.

“Looking back to March, when we outlined our Lace Up plan and our longer-term targets, we were coming off a strong holiday and had not yet seen the full weight of the macro environment on our lower income consumer,” said company President and CEO Mary Dillon on an analyst call. “This became much more evident through the second quarter, including a weaker start to back-to-school.”

Foot Locker now expects same-store sales will drop 9 percent to 10 percent for the year, down from previous guidance calling for a decline between 7.5 percent to 9 percent and guidance at the start of the year calling for a 3.5 percent to 5.5 percent decline. EPS is now projected in the range of $1.30 to $1.50 per share, down from $2.00 and $2.25 under its previous guidance and $3.35-$3.65 at the year’s start.

Shares of Sportsman’s Warehouse fell 26 percent after the outdoor, hunt and fish retail chain’s second-quarter earnings came in well below guidance, and it forecasted another double-digit comp decline for the third quarter.

On an analyst call, Joe Schneider, chair and interim CEO, said finding a new CEO is the “number one priority” while announcing another round of cost-cutting and accelerated inventory clearance efforts.

“Frankly, the second quarter was a disappointment from a net sales, gross margin and profitability perspective,” said Schneider. “In the quarter, we saw deterioration in revenue as we did not see store traffic improve from the first quarter as we had anticipated; this resulted in year-over-year declines in each of our departments.”

Shares of Dick’s lost 24 percent of their value on August 22 after the U.S.’s largest sporting goods chain reported a second-quarter profit shortfall and reduced its earning guidance for the year due to promotions required to clear inventories, particularly in the outdoor category, and higher-than-expected inventory shrink.

Earnings are now expected in the range of $11.50 to $12.30 on a non-GAAP basis, which excludes the impact of a new business optimization program that includes layoffs. Previous guidance called for EPS in the range of $12.90 to $13.80.

Lauren Hobart, Dick’s president and CEO, noted on an analyst call that it maintained same-store guidance for the year as sales came in positive and as planned. Dick’s still expects same-store sales to range from flat to positive 2 percent for the year.

Hobart also said Dick’s is gaining “significant” market share, is notseeing shoppers’ trade-down to lower-price outlets and feels the sporting goods category has become less discretionary over the pandemic.

“It is really clear and important to note that our consumer is doing very well,” said Hobart. “What we used to consider as a discretionary category has become something that’s very important to them and something they’re voting with their wallet. They want to maintain a healthy active lifestyle—team sports, running, walking—all these things.”

Academy Sports + Outdoors and Hibbett kept their guidance targets for the year despite reporting second-quarter earnings topped analyst targets. Both retailers had reduced guidance when reporting first-quarter results.

On an analyst call, Academy’s CEO Steve Lawrence said that while the retailer was “not happy” to show a 7.5 percent same-store decline in the second quarter, results were in line with first-quarter trends and previously provided guidance while showing steady improvement each month as consumer responded to Academy’s message around value and newness.

“What was encouraging was that, unlike Q1, when we saw the business decelerate as we moved through the quarter, in Q2, we saw steady improvements in both sales and margin rates with each month being successively better,” said Lawrence. “We believe we can continue to build on this momentum as we progress for Q3 into the holiday selling season in Q4.”

Academy’s shares rose 9 percent on August 31 after results were released.

Hibbett’s shares surged 22.2 percent on August 25 on its earnings beat. Sales arrived in line with guidance due to a strong start to back-to-school selling and as strength in some better footwear brands offset weakness in secondary brands and franchises.

“We’re pleased to report a solid performance for the second quarter,” said Mike Longo, president and CEO, on a call with analysts. “While the current environment remains challenging, we’re proud of our ability to execute our strategy and reiterate our guidance for the year. Our consumers are still dealing with higher costs for essential items like food, utilities and gas and thus have reduced some of their discretionary spending.”

Among other sporting goods chains, Big 5 Sporting Goods reported that a slow start to summer selling due to unseasonably cool weather conditions caused second-quarter sales to arrive below expectations, although earnings were above plan due in part to efforts in recent years to be less promotional.

Target reported its first quarterly sales decline in six years, dragged down by cautious spending and backlash by some customers to its Pride merchandise. Target’s same-store sales fell 5.4 percent in the quarter.

In reducing Target’s outlook for the year, Brian Cornell, CEO, told analysts that inflation on food, beverage, and other essentials was “causing these categories to absorb a much higher portion of consumers’ budgets. In addition, consumers are choosing to increase spending on services like leisure travel, entertainment, and food away from home, putting near-term pressure on discretionary products.”

Cornell further said the rollback of pandemic-relief boosts, including stimulus payments, enhanced childcare tax credits, and the suspension of student loan payments, “presents an ongoing headwind that consumers continue to manage.”

Competitor Walmart raised its full-year forecast due to the above-plan performance as Walmart’s U.S. stores climbed 6.4 percent. Walmart is believed to benefit from its higher penetration versus Target in grocery, an essential consumer category. Walmart is seen as having stronger value message that’s driving share gains across income demographics.

Walmart still cautioned that the consumer remains challenged. Doug McMillon, CEO of Walmart, said on a call with analysts, “Jobs, wages, and pockets of disinflation are helping our customers, but rising energy prices, resuming student loan payments, higher borrowing costs, and tightening lending standards, and a drawdown in excess savings mean that household budgets are still under pressure.”

Another winner in the second quarter was Lululemon, which reported second-quarter results ahead of its guidance and lifted its full-year outlook for the second quarter.

The 11 percent same-store gain was on top of a 22 percent hike in the year-ago quarter. Growth marked a deceleration from the 17 percent growth seen in the first quarter, but Calvin McDonald, CEO of Lululemon, said on a call with analysts that sales in North America have picked up in recent weeks. He said, “We are seeing our business in North America accelerate relative to quarter two.”

Among department stores, Macy’s, Nordstrom and Kohl’s each reported earnings topped analyst estimates, but all three reiterated guidance for the year due to the continued cautious consumer.

Shares of Macy’s fell 14 percent on August 23 after the retailer warned that it expected weak consumer spending through the crucial holiday shopping season and signaled a faster-than-expected rise in credit card payment delays.

“The macro environment is having the lion’s share of the impact on credit and is a real indicator of where we think the health of the consumer is … supporting our cautious approach,” Macy’s CFO Adrian Mitchell said on a conference call.

Same-store sales fell 7.3 percent at Macy’s and 5.0 percent at Kohl’s. Nordstrom, which doesn’t report same-store sales, saw net sales decline at the Nordstrom banner and 4.1 percent at Nordstrom Rack.

Cathy Smith, Nordstrom’s CFO, said on an analyst call, “We continue to see a cautious consumer, and it remains to be seen how changes in inflation and higher interest rates will affect discretionary consumer spending in the second half of the year, particularly during the holiday season. We saw sequential top-line improvement in the second quarter. However, while it is early in the third quarter, sales trends have decelerated at both banners.”

TJX Cos. Ross Stores and Burlington Stores topped expectations, prompting TJX Cos. and Ross Stores to raise their 2023 outlooks. 

Ernie Herrman, TJX’s CEO said on its quarterly call, “The marketplace is loaded with outstanding buying opportunities and we are confident that we will continue to offer a terrific mix of brands and an outstanding assortment of gifts to our shoppers during the fall and holiday selling seasons.”

Burlington Stores reduced its guidance due to “significant economic pressure” on lower-income shoppers, its core customer.

In slightly lowering Shoe Carnival’s guidance for the year, Mark Worden, president and CEO, told analysts that the family footwear chain continues to see softness in the segment of customers with household income under $30,000, including its urban lower-income customers. He said, “We see this headwind as an ongoing challenge throughout the remainder of the year.”

Designer Brands, the parent of DSW, and Caleres, Famous Footwear’s parent, both reiterated their guidance for the year after seeing second-quarter profits top analyst expectations despite sales declines.

Photo courtesy Warren Baxter MBA CEBC / LinkedIn