The sports-retail industry tends to perform in tandem, as demand at one store is usually a reflection of how others perform. So far, to start the year, Big 5 Sporting Goods (NASDAQ: BGFV ) , Cabela's (NYSE: CAB ) , and Hibbett Sports (NASDAQ: HIBB ) have all reported poor earnings. Dick's Sporting Goods (NYSE: DKS ) is the only company that had a somewhat decent quarter. With that said, is it time to give up on sports retailers, or is there value somewhere in the space?
Soft start creates large losses
Big 5's stock fell nearly 20% after guidance failed to impress investors. Like other sports retailers, Big 5 had a strong 2013 due to demand in firearms, thus its 6.1% decline in revenue year over year wasn't too big of a surprise.
However, comments regarding a soft start to the second quarter weren't taken lightly, as investors appear almost intolerant to excuses of poor weather and the prior year's firearm demand. With guidance for low-negative to positive-single-digit comparable sales, investors might be forgetting that 2014 is comparing to a year in which comps grew 4.4%.
No mention of soft start saves Cabela's
Cabela's fell in much of the same boat as Big 5 in its first-quarter report. The company's comparable sales in the quarter fell a whopping 21.7%. However, unlike Big 5, Cabela's stock has managed to keep its head above water and trade slightly higher following the report.
In retrospect, investors know that Cabela's comp sales grew 24% in the first quarter of 2013. Cabela's also did a great job at explaining how firearms and ammunition played a part in this year's decline, falling 39% and 32%, respectively, in the quarter. Also, there was no harsh or worrisome language regarding current demand, which is likely why the stock avoided the big drop.
Where do margins go?
Hibbett Sports is largely considered the most efficient of sports retailers, having an industry-best operating margin of 13.3%. However, despite a 1.7% increase in comparable-store sales in its last quarter, shares are currently 10% lower following earnings, as both the gross profit and net income fell in comparison to the year prior.
Clearly, Hibbett remains a stock tied to high margins and its ability to maintain its profits. Therefore, guidance for flat to slightly positive gross margin growth for 2014, combined with positive comp growth, should signal a stock recovery. However, after a year of declining margins, the question is whether investors are confident in this guidance.
The best thus far
Dick's is currently trading flat since reporting earnings, although the quarter itself was solid. Like Hibbett, growth was not a problem, as revenue increased 7.7% and the company guided for full-year comp growth of 3% to 4%.
Also, surprisingly, Dick's saw net income growth for the quarter. Albeit, its profit margin did decline by 70 basis points; but still, given the declines that we've seen stemming from January and February, Dick's had without question the best quarter of the bunch.
Where's the best investment?
Cabela's remains the most tied to firearms and ammunition, and for this reason, its stock soared 170% from 2012 till the end of 2013. However, after such large gains, upside appears limited, especially in a company that'll struggle to find growth this year.
At 20 times earnings, Hibbett isn't especially expensive. But with an operating margin declining in the first quarter to complement slight declines in fiscal 2014, the stock might have limited upside moving forward.
As for Dick's, it remains the quintessential sports-retailer investment. And at 19.3 times earnings, it could very well continue to perform well. This is a company that'll continue to grow and improve margins, making it a good long-term buy.
Final thoughts (the most upside)
It's a tough pill to swallow that Big 5 lost 20% of its already beaten-down valuation by mentioning weak initial traffic. This is a company that's still expected to grow in 2014, thus implying that the back end of the year could be solid.
Not to mention, Big 5 was far behind the curve in establishing a fully integrated e-commerce platform and is in the process of rolling it out to consumers. Hence, this is likely a driving force to create a better second half of the year.
As a result, with Big 5 trading at 9.5 times earnings, it's cheap; and with a 2.6% dividend, Big 5 pays by far the best dividend in the space. With that said, you can't go wrong with Dick's, but Big 5 looks like an intriguing oversold, long-term, and cheap investment opportunity within this space.
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