TSA Looks to be Turning Corner with Q1 Gains…

The Sports Authority has apparently been successful in upgrading the quality of traffic in its stores as management moves to increase its mix of better goods in footwear, apparel, and equipment, and away from the traffic based on price and low-priced merchandise. The resulting reduction in traffic appears to be of little concern as TSA uses its updated formats and product mix to generate higher average transactions and improved merchandise margins. The improvement in product mix, coupled with supply chain initiatives that reduce inventory and improved ins-stocks on critical items, are expected to help drive increased sales and profits for the year.

Merger integration charges are now a thing of the past, but the retailer still has a task ahead of them converting all stores to a common nameplate, a key component in reducing costs in the advertising line by eliminating the duplication of marketing efforts in each market. TSA completed the consolidation of The Sports Authority nameplate in four markets in Q1 with the re-branding of 58 stores in Chicago, Dallas, San Diego, and Sacramento. The next wave of re-branding is expected to occur in the fall, with all stores converted by spring of next year.

The advertising effort is bearing more fruit thanks to the supply chain efforts that sees the in-stock status of advertised items running in the high 90% neighborhood. The in-stock on E-3 replenishment items is running in the mid-90’s and generated 42% of sales for the period while representing just a third of the inventory. A new back-stock program, which now contains over 700 items after a successful fourth quarter test, represented 10% of Q1 sales. The SDQ program, which includes pre-packed goods shipped by the vendor directly to the stores, amounted to over 20% of inventory receipts for the period, or over 30% on a unit basis. The combined efforts here led to a 4.2% decrease in inventory per square foot in the quarter, or a reduction of $13.5 million of the $50 million reduction goal for the year.

Despite the reduction in inventories, TSA was able to put together positive comps for two consecutive first quarter periods, driven by “strong performances” in activewear, footwear, and select hardgoods categories.

The gains here were offset in part by continued softness in the outdoor, primarily in paintball and hunting, and wheeled sports, including in-line skates.

The performance apparel business was said to be performing “extremely well”, thanks to in-stock positions and strength in Nike, Under Armour, and adidas. TSA highlighted strong allocations of Nike Pro apparel as a key contributor.

Footwear continued to strengthen as the retailer expands its marquee and performance products from Nike with the addition of shoe walls in their stores. TSA currently has 211 stores up-fitted and expects to have 275 in place by year-end. Management also sees continued strength in “premium-priced footwear” from adidas, Asics, and New Balance.

The success of footwear and apparel will continue to eat away at square footage dedicated to hardgoods, particularly in the paintball and hunting categories in outdoor. TSA sees continued “competitive square footage expansion” and “flat consumer growth” contributing to the challenges here. Management said they walked away from the outdoor/hunting business in 60 markets, but saw “very, very slight declines” in transactions, but big increases in the average unit retail. TSA still sees maintaining the family camping and fishing business, and will control their salt water fishing segment.

On the plus side in hardgoods, fitness was said to have “improved dramatically” during the quarter, with a positive comp trend in the latter half of the period continuing into second quarter. Management pointed to a “more focused higher-end assortment” this year that is generating more true fitness enthusiast traffic as they saw when they rolled of the Golf Day project and the shoe walls. Golf was said to be “slightly positive” for the quarter. The team sports business started off “a bit sluggish” for TSA, but finished the quarter almost flat despite the impact of hockey sales that were down significantly.

Private label represents 11% of sales.

Reported gross margins were down 60 basis points for the period on efforts by TSA to liquidate much of the older merchandise. Merchandise margins were actually “slightly higher” than last year.

The company opened five stores and closed four stores during the first quarter for a total of 393 stores in 45 states at quarter-end. TSA also completed an additional 14 remodels of the old TSA stores in the period, with a total of 60 stores earmarked for the year. They have only remodeled 15% of the total store base, but management said the results to-date have been “very encouraging”, contributing a mid-single-digit lift to comps in their first year before trailing off to normal gains thereafter.

TSA plans to close two smaller format Gart stores in Q2 and another in the fourth quarter. They plan to open or relocate a total of 18 stores in 2005.

Looking ahead, TSA sees second quarter diluted EPS in the 47 cents to 49 cents per share range on total sales of $620 million to $625 million and comp store sales in the 1% to 2% range. In Q2 last year TSA posted diluted EPS, excluding merger integration costs, of 45 cents per diluted share on $605 million in sales. For the year, the company is forecasting diluted EPS ranging from $1.90 to $1.97 on roughly 2% growth in comp store sales.