Things look to be moving along nicely with the integration of the former TSA and Gart businesses, but it is increasingly apparent that the new management team will have a lot of work and expense — ahead of them cleaning up the dozens of TSA stores that could still be a drag on the business.
For some reason the Street expects this thing to right-size overnight and some analysts took a dim view of managements earnings estimates for the fourth quarter and the full year, sending shares down 8.8% to close at $39.66 on Friday.
The company beat analysts expectations for Q3, reporting net income — excluding integration costs — of $4.4 million, or 17 cents per diluted share, versus a loss for the combined entity in the year-ago period. The results beat TSAs own recent estimates of 13 cents to 15 cents a share, as well as analysts consensus estimate of 14 cents per share.
Including the merger expenses, TSA posted a loss of $7.7 million, or 31 cents a share on a 1.7% comparable store sales gain. Integration costs were $19.7 million for the quarter.
The issue for the analysts appears to be TSAs look-ahead forecast for Q4 earnings that are now estimated to be at the lower end of the analysts expected EPS range, but are still at least a nickel per share above the companys last guidance. TSA sees flat comps in Q4.
The new TSA saw positive comps in all three months of the quarter and reported strength in activewear, camping, hunting, team sports fitness and licensed apparel. Baseball, both apparel and equipment, was said the be “very, very strong” and Basketball was “extremely strong”.
The outdoor categories, which were up in the low single digits, were said to be “exceptionally strong” and sportswear/activewear was up “like 9%”.
They saw weaker comp results in the SnowSports apparel categories that were up against strong Q3 numbers at Gart end of the business last year. The company said that footwear, particularly mens athletic footwear, continued to be weak, but has started to run positive comps, “especially in the mens and womens categories”, since the end of the fiscal third quarter.
The merger appears to running smoothly, supported by the fact that over 120 people moved from Florida to Denver to assist in the transition. The help from these folks obviously provides the former Gart team with valuable insight into what works for the former TSA stores on the East Coast. Half of the SVPs are TSA management and one-third of the combined buying staff is from the former TSA group.
The company is counting on a number of merchandising initiatives to move the comp sales needle. Foremost in importance is the continued remodel of 135 older TSA stores over the next two years. The changes will enable the company to “expand regionally specific merchandise assortments” of winter products in the Midwest and Northeast. Management said that they were able to add The North Face and Columbia in 45 doors in the Northeast for the fourth quarter.
At the same time, TSA plans to expand the Golf Day concept shops to over 70 locations by the end of 2004. TSA also sees expanding its special-order and team sales business throughout the newly merged chain. Additionally, the company will revise its footwear department to a more “hybrid” model that will be self-service on price-point product and full-service on better goods. The change is also expected to significantly cut the cost of store remodels.
Current average cost to remodel a TSA store is now estimated at $263,000, down from close to $400,000. TSA will spend about $35 million on store remodel expenses.
And Lays Out Growth Plans for 2004…
The remodel plans require a 2.2% lift in comp sales to pay for the remodels, roughly half the 5.0% lift Gart saw with the Sportmart remodels.
As the company has previously noted, they will close 22 TSA stores and one Gart location. The plan is to pull out of unprofitable stores and locations that show duplication in a particular market. A report last week in the local Raleigh, NC paper revealed that TSA will pull out of that market entirely, closing its lone Triangle store and leaving Dicks Sporting Goods to dominate the fast-growing area with five stores and a new two-story, 80,000 square foot store to open next year. TSAs 45,000 sf location was reportedly a former Jumbo Sports store. That should have been the first clue.
TSA opened three new stores in Q3 and will open six more in the fourth quarter, bringing its total to 379 stores with approximately 16 million square feet by year-end. They plan to open 20 to 25 new stores with an additional 950,000 square feet in 2004.
Next years comp store sales are expected to increase 2.0%. A 20 basis point gross margin gain is expected to help deliver $41 million in net income for the year, or diluted EPS in the $2.55 to $2.60 range. Inventories are forecast to decline 3.0% on a per square foot basis.
>>> The win here going forward will depend on the drag they see from the older TSA stores and how much progress their competition can make while they re-tool the poorer stores over the next two years…
..Which Don't Include Europe…
In related news, The Miami Herald is reporting that Jack Smith, the founder of The Sports Authority, is part of a group attempting to acquire the Giacomelli Sport Group, Italy's largest sporting-goods chain. The report said that GSG is currently seeking court protection from creditors.
Smith indicated in the story that he has been asked to join the group as CEO of the 137-store chain that went public in 2001. The company asked a court last month to name a trustee to avoid bankruptcy after failing to raise enough cash to pay off debt and make a profit, according to a Bloomberg News report.
There was evidently a bit of confusion surrounding Smiths initial contacts with the company that outlined a $15 million monthly investors' guarantee. Smith reportedly sent the letter via e-mail using The Sports Authority letterhead, which he told the Herald he has had since leaving TSA.
He told the paper he later sent a follow up letter that he said “made it clear” that “The Sports Authority had nothing to do with the bid”.
>>> Buy it? Didnt think so…
