Earnings season quickly turned to warnings season last week as a couple of retailers sounded warning bells on second quarter performance based a few issues that should not come as much of a surprise to anyone.
While the sporting goods retailers dont report monthly numbers, their brethren in department stores and the mid-market clearly signaled problems at retail in June due to cooler, wetter weather, primarily in the Northeast and Midwest. The other key issue has to do with the slowing of Licensed Apparel, a trend many have been talking about since the first of the year.
The weather issue was the primary driver for an earnings warning issued by The Sports Authority on Thursday, while a combination of the weather issue and the Licensed Apparel problem were cited as Hibbett Sports cut its Q2 sales and earnings estimates on Wednesday.
Unfortunately, all ships tend to rise and fall on this type of news and it affected the broader sporting goods and athletic specialty retail market a great deal, movement which did not go unchallenged by others affected by the warnings. Dicks Sporting Goods, which is TSAs largest competitor in the East and West, on Thursday quickly re-affirmed its earnings outlook for the second quarter, while Big 5 Sporting Goods, which is TSAs largest rival in the West, re-affirmed its Q2 earnings numbers and reported positive comp store sales numbers for their quarter that ended June 27, 2004.
But the damage was done for a few as one analyst downgraded both Reebok and Foot Locker on the Hibbett news, citing “incremental sales and margin pressure” that could hurt the two key players in the Licensed Apparel market. Reebok fell to a 52-week low on the news, but recovered to close up 2.4% for the week. Foot Locker shares were off 4.1% for the week to close at $20.87 on Friday. To be fair, the analyst issuing the downgrade also pointed to FLs rising inventory issues, particularly in Europe, and Reeboks exposure to Nikes move back into Foot Locker and their market share grab in Europe. Reebok countered in their Q2 report (see page 10) that Licensed bookings were up double-digits for second half.
The issue also hit FLs mall rival The Finish Line a bit, which initially dipped on the news but recovered after the retailer issued a release outlining a new dividend program. Finish Line has been talking about the issue for the last two quarters and had already forecast that much of its Licensed Apparel business would shift to more fan-based sales this year. They also said on their last conference call that Licensed would make up about 55% of total apparel sales this year, versus roughly 65% in the last fiscal year.
After a number of hints at investor conferences over the last two weeks, HIBB was apparently forced to quantify its comments about the slowdown in Licensed sales. While FINL and others talked of the slowing trend, it was a big revelation for Hibbett, which saw College Licensed sales increase in high-single-digits in the first quarter and Pro Licensed sales increase in high-double-digits for the period.
Mickey Newsome, chairman, president and CEO of Hibbett, said that the current quarter started off above expectations, but that they had experienced a slowdown in Licensed Apparel and Fitness Equipment over “the last few weeks”. Newsome said they had expected to see Licensed, particularly on the Pro side, soften in Q3, but it had “slowed down more dramatically and sooner than anticipated”. He did say they continued to post “strong results” in Footwear and Team Equipment.
Mr. Newsome indicated that the Licensed slowdown in Q2, coupled with rainy weather in June, has caused the retailer to get more aggressive with markdowns in the two impacted categories. They see the sales shift away from higher-margin Apparel to more Footwear resulting in “lower overall margins for the quarter.” HIBB now expects Q2 earnings to be in the 13 cents to 15 cents per diluted share range on comps of 2% to 3% for the quarter, versus previous estimates that called for EPS in the 18 cents to 20 cents per diluted share range on 5% to 6% comp store sales growth. Hibbett shares fell 14.2% for the week to close at $19.33 on Friday.
At The Sports Authority, the now national retailer approaching its one-year anniversary of the merger of TSA and Gart Sports issued its reduced guidance that will see the company post second quarter EPS of 41 cents to 48 cents per diluted share on comparable store sales that are expected to decline 4% to 5% for the period.
The warning, which sent TSA shares tumbling more than 23% for the week to close at $24.46 on Friday, is a far cry from the companys most recent guidance that forecast earnings of approximately 70 cents per diluted share on flat same-store sales. The quarter was expected to be a “gimme” since TSA never reported sales or earnings for the second quarter last year and no comparisons could be made. The market only had TSAs own projections to work with as they modeled the quarter and the year.
Doug Morton, TSAs chairman, president and CEO, said that sales results for the quarter were “negatively impacted by the unusually cool and wet weather” in many key markets. He said the more seasonal outdoor categories “under-performed expectations” while Footwear was “generally on plan”. Like Hibbett, TSA also saw a continued slow down in Fitness Equipment sales.
Morton did point to a few positives, including the success of the remodels at the older TSA stores, which has netted a 7% sales increase in the 27 remodeled stores since the merger. He also said gross margin “continues to trend positively” versus last year.
The reference of the hit to “more seasonal outdoor categories” sent the market scurrying to dump outdoor-oriented stocks as Cabelas shares fell 8.7% for the week to close at $26.80 on Friday and Gander Mountain dropped 12.1% for the week to close at $20.65.
Big 5 Sporting Goods also got hit for the week, closing at $21.25 on Friday, down nearly 10% for the week. Big 5 may have waited too long to respond to the bad news at TSA, issuing a release later on Thursday that confirmed previously announced earnings guidance of 34 cents to 36 cents per share for its fiscal Q2. They also reported that net sales for the period ended June 27, 2004 increased 8.5% to $184.5 million from $170.1 million in the year-ago period. Same-store sales increased 3.9% for the quarter, the company's 34th consecutive quarter of same-store sales growth.
DKS shares were down 5.9% for the week to close at $30.71 on Friday despite efforts by the company early Thursday to assure investors that they were on track for the current quarter. Unlike Big 5, which closed its second quarter at the end of June, Dicks still has a week to go in their quarter and could not provide sales numbers. They did re-affirm their previous outlook for the quarter, which called for net income in the $16.8 million to $17.2 million range, an 8% to 11% increase over the $15.5 million delivered in the year-ago period. EPS are seen increasing 3% to 6% for the period to a range of 32 cents to 33 cents per diluted share versus 31 cents in Q2 last year.
>>> Wasnt TSAs new “national” strategy supposed to mitigate the regional effects of weather???
>>> SEW noted that Morton is now COB at TSA. We confirmed last week that Hanaka is still a director, but has relinquished the chairman role to Doug
>>> The warnings — and market performance — are in sharp contrast to the strong performances reported on the vendor side of the business this week…
