As the first wave of second quarter reports started to come in for the sporting goods and athletic specialty retail sectors last week, the sluggish nature of the sales gains put just enough doubt in the minds of investors to send all industry stock indices lower for the week (see charts below) for the first time since mid-May, and the biggest overall decline since the second week of April of this year. One concern is the apparent inability of the retail sector to capitalize on the recent push to more technical goods that has been led by running footwear and performance apparel.

But the weak results for the second quarter reported last week are primarily due to issues outside this move to performance, as the hook ‘n bullet business continues to suffer from over-saturation of real estate, European economies wreak havoc on retail results there, and the back-to-school business starts to look like Christmas sales, arriving later each year.

The quarter was troubling for many as the market saw a consistent, conservative retailer like Dick’s Sporting Goods have to admit that the acquisition of Galyans had not provided as much upside as expected, while watching Foot Locker, Inc. see most of its upside from the return of Nike marquee product erased by trouble at its European unit, forcing management to back off its consistent message of 10% to 20% EPS growth for the year.

But there was also light at the end of the tunnel as both The Sports Authority and Hibbett Sporting Goods posted improved margins and an increase in their bottom lines thanks to a move away from second quarter footwear promotions.

The shift in the BTS footwear selling period is not unlike the rest of the retail business that has seen winter apparel now actually sold in the winter and Christmas goods that are sold in January thanks to jumps in gift card giving. Kids are clearly waiting to get to school before committing to new footwear and apparel looks for fall. And as more school districts move their calendars back to after Labor Day to protect their states’ tourism industries, the market can only expect the trend here to continue. North Carolina made the move this year and Wisconsin, Michigan, and other states have measures pending for next year.

into what is working in the industry. The small market retailer, which is focused primarily on performance goods and team sports, is not affected by the retail landscape in Europe or the amount of retail real estate currently invested in the hunt/fish/camp business. HIBB, which moved past the 500-door mark for the first time, posted a 67% increase in the bottom line on a 15% sales increase that featured a comp sales gain that grew incrementally from the comp gain posted in Q2 last year.

Company chairman and CEO Mickey Newsome said they achieved the comp sales gain with three fewer promotions this year than last, which had a measurable effect on the gross margin line. “This year with our inventory very clean, we went for margin, and I think it worked,” said Newsome.

Hibbett did not anniversary a bounce-back coupon program from last May or two footwear BOGO promotions last July. The result was a mid-single-digit comp gain in May and June, and a low-single-digit gain in July. Mr. Newsome said the last two weeks of July last year represented 20% of Q2 sales.

The good news here is that August has apparently started off stronger, with comps up 7% through the first 19 days of the month. Newsome said this was on top of a 5% gain last year. He felt the start was important because August represents 42% of third quarter sales.

Apparel was up in single-digits, led by performance product from Under Armour and Nike. Enyce, Dickies, and large graphic tee’s were called out on the urban end of the apparel business, which was up in double-digits. Women’s was also up in double-digits. The licensed apparel business continued to be a drag, comping down in double-digits for the period. They do see the college business comping positive for August, but Jeff Rosenthal, VP of merchandising, said they are still planning the NFL business down for the year, while the NBA business is planned “way down.”

Footwear was up in single-digits, led by kid’s and cleats, which were up in high-singles. Rosenthal called out Nike Shox, Impax and cleats as key performers, as well as Asics and Mizuno technical product. He also pointed to Fila basketball product as a key performer. Classics have “slowed down somewhat,” but price-points are increasing in the category.

Hardgoods were up in single-digits, led by football, Under Armour, Nike receiver’s gloves, and Shock Doctor mouthpieces. Fitness was up in single-digits, with Ab Loungers and boxing called out as key performers.

Hibbett said they expect to continue with a strategy of higher price-points, cleaner inventories, and better turns. Average inventories per store were “basically flat” from a dollar perspective.

Mr. Newsome had an interesting take on the rising price of gasoline. Unlike the big-box outdoor guys that have built their businesses around destination shopping, Newsome pointed to the fact that their stores are generally in smaller towns that are 30 to 50 miles from the nearest major mall (and a mall competitor like Foot Locker or Finish Line). He sees this as upside potential for Hibbett as consumers stay closer to home and shop local retail.

Hibbett opened 16 new stores and closed one store in Q2, bringing the store base to 508 in 22 states at quarter-end. They see a few stores planned for this year slipping into fiscal 2007, but still plan to open roughly 70 to 73 net new stores this year, including a net of 18 to 22 stores in Q3.

HIBB raised its guidance for the year to a new range of approximately $1.37 to $1.42 per diluted share and a comparable store sales increase in the mid-single-digit range. Third quarter earnings are seen in the 30 cents to 34 cents per diluted share range on a mid-single-digit comp store sales gain.

($ millions)  Hibbett Sporting Goods 
2005 2004 Change
Total Sales $94.0 $81.8 15.0%
Gr. Margin 31.5% 29.5% +190 bps
SG&A % 21.1% 21.0% +10 bps
Net Income $4.9  $2.9  +66.9%
Diluted EPS 21¢ 12¢ +75.0%
Inventories $114.1  $100.7  +13.3%
Comp Sales +3.1% +2.5%