Retailers Maintain Strong Profit Growth in Fiscal Q1

Aggregate margins for Q1 this year still turned in a solid 260 basis point improvement for the quarter — in line with Q1 last year — but profit growth moderated a bit for the quarter, generating bottom-line growth of nearly 70 percent for the period and outpacing the sales growth by a 10:1 margin.

 

Overall results for the retailers covered in the chart on page 11 were quite strong despite a fiscal first quarter through April that was marred by the weather issues early on in the quarter due to an abnormally long and brutal winter in key selling regions. In February and March, for example, as new spring apparel stayed on the rack, retailers were still selling more full-price winter clothing and capitalizing on post-holiday sales.

Likewise, the Easter holiday — a key selling period for footwear and apparel retailers — was pushed later into the quarter this year versus the year-ago period. Still, lower unemployment numbers and pent-up demand for spring apparel prompted the consumer to start spring shopping earlier than usual. During the front-half of the quarter, analysts surmised that discretionary income would be at a premium due to skyrocketing fuel and food prices, and while that has reportedly caused people to cut down on vacations, it doesnt appear to have significantly impacted sales in the retail aisles in Q1.

The quarter was also buoyed by improving customer sentiment that was spurred by assorted stimulus funds and a reduction in the payroll tax.

Aggregate retail revenues for the fiscal first quarter ended April 30 improved in the mid– to high-single-digits, driven by double-digit sales growth from the Specialty retail sector, which followed up a solid Q4 2010 when it recorded high-singles revenue growth.

 

The sectors also provided the largest overall earnings boost for the quarter. Sales growth moderated slightly for the Sporting Goods sector to mid-singles trends while the Family Footwear sector saw sales dip for Q1 versus high-singles growth in the preceding quarter, thanks in large part to the later Easter and a weaker toning business. Overall, 20 of 23, or nearly 87 percent of the reporting retailers reported revenue growth for the fiscal first quarter.  Moreover, 50 percent of those retailers reporting growth for the quarter saw double-digit improvement versus the year-ago period.

For the Specialty Sector, aggregate sales improvement was driven primarily by Adidas Group Retail, which includes both Reebok and Adidas stores, Foot Locker, Inc., Genesco, Lululemon and Zumiez. Earnings for the sector jumped nearly 220 percent while the aggregate margins improved by 260 basis points.

At red-hot Lululemon, which has successfully tapped into the high-end yoga business and still sports most envious sales per square foot metric in the business, sales improved more than 35 percent while comps soared 19 percent. Earnings improved by more than 70 percent as the retailer said it was able to overcome low inventory levels during the quarter. LULU has added 12 new stores since the first quarter of last year and plans to ramp up its online presence through social media, Web advertising and mobile applications moving forward. For Q2, revenues are expected to be in the range of $200 million to $205 million based on a comp increase in the mid- to upper-teens on a constant-dollar basis.

At Foot Locker, a 12.8 percent comp store sales gain and 200 basis points of improvement in gross margins powered first quarter profits 74.1 percent to $94 million, or 60 cents a share, which clobbered Wall Street’s consensus estimate of 44 cents a share. Management noted that Foot Locker Europe was the strongest performer for the quarter while Foot Locker Canada struggled a bit against last years Vancouver Olympics. The star performer was the U.S. region, with comps surging in the teens despite the “slight drag” caused by the year-over-year decline in toning footwear. Foot Locker’s direct-to-customer segment, which includes Eastbay, topped 20 percent comps for the quarter with store banner websites delivering especially strong comps.

At Genesco, first-quarter earnings surged 75 percent and sales were up more than 20 percent, driven by double-digit sales growth at its two largest businesses, Journeys and Lids Sports. The retailer also raised earnings guidance for the full fiscal year. Same-store sales at Genesco improved by 14 percent, largely due to a 42 percent comp jump from Lids.

For the Sporting Goods segment, sales improved in the mid-single-digits while earnings improved by more than 40 percent and margins remained flat. Every reporting retailer within the Sporting Goods segment recorded revenue growth in fiscal Q1, including a 10 percent plus gain from Hibbett Sports, which partially attributed a strong quarter to higher initial markups, cleaner inventory and assortment planning efforts.

Dicks Sporting Goods improved a healthy 6.3 percent despite heavy rains in key areas of the country that kept kids off the baseball fields and dad off the golf course. Meanwhile, strong cost controls and higher merchandising margins helped the sporting goods giant beat early EPS guidance and record 40 percent-plus bottom line growth.

At Forzani, which will soon be acquired by Canadian Tire, sales in local currencies edged up by less that 1 percent as double-digit growth in Wholesales sales offset low-singles weakness from retail. Comps slipped 2.0 percent for the quarter due to a late spring and the anticipated difficult of matching sales from the year-ago Winter Olympic in Vancouver, but management said comps had rebounded strongly in May. Gross margins slipped 140 basis points to a third of sales in the quarter due to a decline in high margin licensed Olympics-oriented products as well as an increase in the percentage of late season clearance items versus new spring stock.

For the Family Footwear sector, sales dipped slightly on declines from Famous Footwear (-5.4 percent) and Payless (-7.8 percent). DSW recorded low-teens sales growth that benefitted from similar comps growth. The comp gain reflected increases in customer traffic, customer conversion and units per transaction while strong growth was seen across categories and genders, led by strategic growth areas of accessories, men’s footwear, private brands, and key items. Excluding growth from DSW, aggregate sales for the Family Footwear sector would have declined in the mid-single-digits as the late Easter and a downturn in toning took their toll.