Since the day the rumors started flying about a potential merger between Gart Sports and The Sports Authority there has been an ongoing debate about which of the two divergent personalities would be assumed by the new national sporting goods retail entity. The discussion, which centered around whether the New TSA would be more a “relationship first, business second” retailer like the former Gart Sports, or a “business first, relationship second” retailer like the old TSA. The Gart persona appears to be winning out, but the retailer appears to be ready, willing, and able to leverage their newfound clout with vendors.
With the company announcing last week that Elliot Kerbis, the New TSAs president and chief merchant, had resigned and moved back to Florida, those that hoped for a return to the relationship-centric business that was Gart Sports may finally get their wish. Many that worked closely with both organizations saw an “oil n water” scenario with Kerbis in control of vendor relationships, a point of view created when the old TSA started their bidding programs that saw many long-time vendors replaced by the latest (re: cheapest) line du jour.
Doug Morton, TSA vice chairman and CEO, will assume the chief merchant role as they look for a replacement for Kerbis, but pointed to five “very, very strong” SVPs on the merchant side. “This is one person leaving out of a merchandising organization of well north of 150 people,” said Morton.
Most doubt that the programs instituted by the former CMO will be abandoned, as they clearly have helped the merged entity raise gross margin along with actions the former Gart team has made to raise prices and offer better products. Morton said the company will still move to consolidate vendors, especially in apparel, based on margin contributions by those vendors. But Morton also said that some branded vendors will pick up some of the business that had gone to private label where those vendors are able to be more aggressive in pricing.
The CEO said they are on the right track to higher price-points, better quality products, and in-store changes to support the new mix. “Its going to take more than Elliott leaving to make me change my mind about that,” said Morton.
The improvement in gross margin in the period was due in large part to improved merchandise margins, which contributed about 130 basis points to the GM gain. A change in accounting practices delivered the balance, offset a bit by weaker comp store sales for the quarter.
Comparable stores sales inched up just 0.3% for the period, with the former Gart stores comping up about 4.0% and the former TSA stores comping down 2.5%. The meager gain is up against an 8.8% decline in the Gart stores last year and a 5.7% comp sales decline at TSA in the year-ago period.
Management back in March had forecast a 2% comp sales gain and analysts were looking for a 3% gain. The shortfall, along with a lower-than-expected forecast of full year comps in the 2% to 3% range sent TSA shares lower on Wednesday, but finished up 1.7% for the week to close at $34.10 on Friday.
Morton said sales at the former Gart doors were strong in apparel, baseball, team sports, hunting, and snowboard. The former TSA stores showed strong results in the hunting, outdoor, and ski categories. In-line skates and footwear were “difficult” for the total company.
The CEO said that footwear suffered due to the move away from the BOGO half off sales in Q1 last year, trading improved margins for lower top-line sales. He said they had gone on BOGO a couple times — excluding the Nike product — but said it was something they “need to get off of” in the long-term.
Tom Hendrickson, TSA CAO/CFO, said that fitness equipment, specifically in the TSA stores, was the only real disappointment they saw in the business. Apparel and footwear were each about 21% of the business in Q1. Private label was about 7% of the business, but TSA sees that going to the 10% to 11% range by fourth quarter.
TSA joins the list of all other sporting goods retailers in citing Nike and Under Armour as the key performers in apparel. Morton said consumers are “flocking” to those performance products — despite higher price points — based on the value assigned to the product. Licensed apparel was up double-digits, a trend not seen in the fickle athletic specialty sector, but clearly echoed last week by Hibbett during their call. The strength here versus the weakening at mall teen retailers could signal that shift to a more fan-based business we have heard from others for the last six months or so.
Interestingly, TSA is also the only retailer so far that has cited the Just for Feet liquidation sales as having an impact on the business. Morton explained that the JFF stores that are located in the markets where TSA plays made up about 70% of JFF volume and therefore had a more concentrated impact on their business.
Management sees Gart driving the comps in the first half of the year and the former Sports Authority stores to “really start contributing” as the store remodel and re-fixturing initiatives get in place.
In an effort to better reflect the integration of the company, management going forward will refer to results on a regional basis rather than on a nameplate basis. The company expects to have 80% of its assortments integrated across the chain by July.
The margin gain, along with a clear SG&A upside in leveraging the business across the merged entity, helped drive net income higher for the period.
Although the New TSA reported total merged entity numbers this year against just the Gart business last year, pro forma results revealed a 190% increase in net income for the period versus last year, delivering EPS of 35 cents per diluted share before integration costs, a penny above earlier estimates.
TSA appears to be looking to Nike to help turn around the footwear business, and the conversation sounds oddly familiar to one we heard last week from Foot Locker. Nike is going to expand allocation of better goods, especially Shox, as TSA improves their footwear departments and adds more full service areas within the department. Morton said the Nike allocated product would make up about 30% of total receipts by H2.
To accommodate the Nike additions, TSA is rolling out new “footwear statement walls” that should be completed by the June/July timeframe. Over 220 stores will have the full-service departments by the end of Q2, representing 57% of doors at that time. TSA is adding 40 Nike mens and womens apparel shops.
The retailer opened seven stores and closed five former TSA and one former Gart Sports store during the quarter to end the quarter with 385 stores in 45 states. Inventories were down about 1.0% on a per square foot basis at quarter-end. They expect to open two new stores during the second quarter.
Full year earnings guidance was raised to a new range of $2.59 to $2.65 per share, up from previous guidance of $2.57 to $2.62 per share. Full year sales are estimated at $2.5 billion, off about 4% from previous guidance of $2.6 billion. For second quarter, TSA is forecasting net income excluding merger expenses to be approximately $18.6 million, or 70 cents per diluted share, on flat comp store sales and total sales of $630 million. The Gart stores are expected to comp up at a similar level to Q1, which would see the TSA stores declining again.
The fact that the old TSA did not report Q2 numbers last year will give the New TSA some cover as there will be no way to compare the real total business for the period. It was not lost on analysts.
There was one more humorous point in managements conference call with analysts when Hendrickson said he had to be careful about what he said about the old TSAs numbers in Q2 because “they really didnt exist” last year. The analyst quickly corrected Hendrickson, quipping, “They really didnt report.”
>>> Seems that everyone is hanging their hat on Nike Shox these days. At what point does it start to get over-distributed in the market
>>> A clear comp store sales deficit exists here against the competition as primary competition comped up in the mid- to high-singles for the quarter. It cant all be JFF related
