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With results out of DKS, FL, and HIBB, we got a nice snapshot into where this industry stands. Bottom line is that inventory is building across the board. Not good. Retailers are shifting to lower-price performance shoes, and are giving new brands a shot. KSWS, PSS and UA stand out on the positive side. Nike and DKS are Neutral to negative. FL and HIBB are scary.

Bottom line here is that inventories are growing too fast. Period. All three retailers had their respective sales/inventory spread go the wrong way. Yes, some look better than others – DKS better, FL horrible.  But this Street is not a good one. The single most notable call out is that the retailers are shifting towards lower price point product, and sound like they are giving smaller technical brands a shot at success. The only non-technical call-out of consequence is FL already making noise that they had cut too deep into their KSWS positioning. This plays into our thesis for KSWS. It also gets us more comfortable with PSS – not only because of Saucony and Sperry (which is doing well), but it validates PSS’ price point positioning (which these other brands still can’t touch with a 20 foot pole). All-in, this is a slight negative for Nike. Let’s not be sensationalistic here… US footwear is less than a quarter of the company’s business, and the recent trajectory is already weak (i.e. no surprise to anyone). But inventory building broadly in the channel, price points shifting down’, and Nike’s largest US customer changing the CEO guard (and likely to find a way to allocate more space to new brands), I still can’t justify being early on this one given the growth profile (or lack thereof).

Sporting Goods: Inventory Building - Sporting Goods SIGMA

Key Points:

Notable thematic trends:

Fashion vs. Performance: FW DKS noted the benefit of less exposure to fashion while FL & HIBB commented that they will be shifting their respective mixes towards performance given the dramatic slow-down in fashion demand.

High vs. Moderate Price: As higher priced shoes become increasingly stressed, all three retailers are focused on increasing offerings  at moderate price points.

Domestic vs. International:  With DKS and HIBB rooted domestically, FL was the only one of the three able to comment on international business, which outperformed in Q2.  While U.S. sales were down mid to high teens, Europe and Canada was down low single digits with Asia Pacific posting high single digit sales growth.

Lateral Call Outs:

KSWS (+): branded and typically more moderately priced (specifically mentioned positively by FL)

UA & NKE (+/-): thematic trend of focusing on performance/technical implies less of a hit for UA & NKE, however, this will be offset in part by a greater focus on moderately priced footwear. While UA has commented that it will produce shoes at broader range of price points, NKE’s AirMax remains the priciest shoe in the shop.

NKE (+): basketball continues to be the standout category in footwear

VFC/North Face (+): HIBB noted that it will be up measurably in back half and in many more doors y/y

COMPANY CALL-OUTS

FL: has the benefit of a new CEO taking the helm at a (another) low point in the company’s performance.

  • We’d have thought that Serra would have printed a better quarter as his tenure comes to a close – regardless of the environment. Our sense is that the ‘cleansing’ would not come until all the skeletons burst out of the closet after Ken Hicks has an offensive plan for the company. We can’t rule out that this is yet to come.
  • Based on Hick’s prior experience at JC Penney, we expect to see a revamped apparel program including much improved private label merchandise. That’s obviously not great for the incumbant brands.
  • Management commented that its posture on moderately priced footwear is officially under review along with the rest of the business. We suspect that it will take some time for Hicks to adjust the portfolio, but are confident that the proportion of lower priced styles and brands will increase next year.
  • FL has been pruning its store base, but we would be surprised if it got more aggressive given the success of other retailers in lowering lease costs.

DKS: is showing signs of its former self – kinda. Results are still horrendous on an absolute basis, but they are trending far better than the group.  Easing inventory and gross margin compares don’t hurt.

  • DKS stands out as one of the only players in this space that is taking up investment spending while others pull back. The company is accelerating West Coast expansion both in acquiring former Joe’s stores and increasing penetration in Southern CA), investing in e-commerce, and building out marketing/merchandising IT infrastructure (originally postponed in ’09) to drive future growth.
  • We debate here amongst our team as to whether this is good for DKS or not (McGough more negative, with the rest of the team positive). We all like when companies spend when the environment is telling competitors to stop writing checks. But Dick’s has a horrific track record of generating any kind of ROI on either acquisitions or organic investment.
  • In addition to the signal of increased confidence in the top-line, we know that pressure from Golf Galaxy clearance activity is expected to subside after Q3 at the same time that gross margin compares get progressively easier (down 190-230bps) over each of the following three quarters.

HIBB: is more clouded as credibility and volatility are now keys to this story.  Even with the rebound in 3Q results, a sustainable improvement in trend remains less clear.

  • Consistent with FL, HIBB appears to be setting the bar low given their commentary that they “want to be absolutely conservative.”  . 
  • Upside is not a given, however, as it would require comps at the high end of the range (flat) in addition to gross margin expansion at the same time the company is shifting to lower priced product.3Q comps are  currently running at a –LSD decline. About 10% of stores should still benefit from a tax free shopping holiday, which could help get to numbers in aggregate. But this is not a slam dunk.
  • On a relative basis, sounded like performance footwear fared better than fashion.  Go forward focus will be continued on performance and more on price.  Fashion appears to be where the risk lies.  More dollars will be allocated to the technical piece going forward vs. fashion (where sell-throughs have slowed).  - KSWS is becoming more performance oriented and FL specifically noted that they need to step up purchasing of the brand.
  • Markets with back to school in full force are showing less price resistance.  Customers willing to pay for what they need.
  • Technical running is being planned up and will get more “open to buy” orders. –Good for KSWS, UA and even Saucony (PSS).

Sporting Goods: Inventory Building - SG CompTable 8 09

 

Sporting Goods: Inventory Building - SG CompChart 8 09