Are Fun Times Ahead for Sporting Goods Retailers?

Consumers' motivations for purchasing sporting goods are to take up new sporting activities or improve their enjoyment and performance in their favorite sports and fitness activities. One way to measure demand for sporting goods is tracking sports participation rates.

For example, The National Golf Foundation publishes data about the number of golfers in the United States. Knowing the growth rate of golf participation can help you analyze the revenue growth prospects for retailers that focus on golf equipment.

 

Minor short-term challenges, fabulous long-term opportunities
Dick's Sporting Goods (NYSE: DKS  ) is a sports and fitness omni-channel retailer that offers brand name equipment, apparel, and footwear.

The company reported that second quarter net sales rose 6.6% to $1.5 billion compared to the same quarter of 2012. Same store sales fell below management's expectations and decreased 0.4%. The company said sales growth slowed due to consumers continuing to be cautious about discretionary spending. Unexpectedly cool, rainy weather was a factor as well.

Good news for the second quarter included a slight increase in gross margin percentage, and the company's operating margin -- income from operations divided by revenue -- holding steady near 9%. The bottom line was net income of more than $84 million and record non-GAAP earnings per share.

On Sept. 18, Dick's outlined its growth strategy between now and the end of 2017, which reflects the company's optimism about its future prospects as the economy continues to emerge from the long recession. The company set an aggressive goal of reaching $10 billion in annual sales by that time. This means a compound annual growth rate of about 11%.

Dick's also intends to significantly build its store base to more than 800 -- a greater-than 300 store increase.

To make this bold vision happen, the company has developed new prototype stores of varied square footage to fit different sized markets, including a smaller 35,000 sq. ft. floor plan. One significant growth area will be Dick's new Field & Stream outdoor specialty stores. Two stores are expected to open in 2013, and the company intends to build this brand to 55 stores by the end of 2017.

A spectacular second quarter
Specialty retailer Cabela's (NYSE: CAB  )  focuses on the hunting, fishing and camping segments of the sporting goods market. The company is the world's largest direct marketer (catalog and internet sales) in those categories, and issues its own VISA credit card.

In the second quarter, Cabela's total revenue rose nearly 21%, compared to the same quarter of 2012, to $756.8 million. Cabela's retail stores achieved a 25.8% increase in revenue. Its direct marketing business showed an 13.7% revenue increase, while revenue from its financial services division was up 11.7%.

Particularly impressive was the 10.5% increase in same store sales -- the seventh quarter in a row that same store sales were up. The company's next-generation stores generated sales that were 6% higher than its legacy stores.

The sales increases combined with efficient management of cost of goods sold and selling, distribution and administrative expenses resulted in net income rising 31.5% to $44.5 million.

Smaller stores but impressive results
Big 5 Sporting Goods (NASDAQ: BGFV  ) operated 416 stores in 12 western states as of June 30. The company's product mix includes athletic shoes, apparel, accessories and outdoor and athletic equipment for a wide range of activities including camping, hunting, fishing, tennis and golf -- even roller sports.

Big 5's stores are smaller than most of its competitors, at around 11,000 square feet. The advantage of this strategy is that Big 5 can serve smaller markets and fit snugly into strip shopping centers.

Revenues for the second quarter ending June 30 were up nearly 6% compared to the same quarter last year and the key retail metric of same store sales was robust as well, up 4.4%. It's important to note that same store sales rose in each of the company's major product categories -- apparel, footwear and hardgoods (equipment).


CEO Steven G. Miller reported that the company achieved a small improvement in customer traffic and a larger increase in average sale.

Efficient cost management was evident across all expense categories. The company's gross profit margin percentage increased a full point to 33.2%. Selling and administrative expenses as a percentage of net sales dropped significantly, from 30.3% in the prior year's second quarter to 28.8% this year.

Higher sales combined with this great margin improvement led to a 138% increase in net income to $6.1 million.  

What we learned
Cabela's stores can be 150,000 sq. ft. or larger. These stores present an attention-grabbing customer experience that could be described as an amusement park for outdoor lifestyle enthusiasts, complete with large aquariums and outdoor wildlife displays.

This company definitely has a winning retail formula -- entertaining customers while they shop for outdoor sports products. Cabela's mastery of its catalog and Internet segments should also help the company continue to grow net income.

Big 5 Sporting Goods achieved a same store sales increase of more than 4% for the same period in which Dick's Sporting Goods saw a slight decrease in same store sales. The company's continued ability to manage costs so expertly should deliver earnings increases that enable its shareholders to enjoy their favorite sport: stock price appreciation.      

Regarding Dick's, there's little to worry about this company's future prospects. Its product mix among a wide range of sports allows it to take advantage of the growth in participation of all of these sports. Because of its size, its innovative merchandising concepts and its confident strategic vision for future growth, Dick's is my favorite of the three over the longer term.    

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