DSW and BWS results were consistent with what we saw last week from the Sporting Goods retailers – weak results overall, with an increasing delta between the quality and junk. BWS is definitely the junk – always has been, always (likely) will be. While DSW is not quite the quality in the group, it is certainly doing and saying things that are far more ‘quality-ish’ than it has in the past. The only similarity between the two is guidance of a low-mid-single digit comp decline in 2H driven by lower traffic. DSW took up guidance and is investing in growth, while BWS is upping the ante on cost cuts – again (the latter is going to run out of steam early in ’10).
Not a surprise that both companies are expecting heavy promotions in 2H; however, BWS was the first we’ve heard state that promotions won’t be about the price, but about the brands. Additionally, BWS suggested that they are underinventoried heading into the BTS season, which is in stark contrast to it’s eroding sales/inventory spread. In an attempt to find the silver lining in the quarter for BWS, all we could come up with is that the company is heavy in athletic inventory, which continues to outperform non-athletic by a wide margin. But that’s a stretch to point to as a positive.
Our bet in this space is still with PSS, which is far better positioned with price points, inventories, branding, and sourcing benefits. We don’t love PSS into the print, but it is the name to own over 12-18 months. Numbers are way too low.
Notable Thematic Trends:
Athletic vs. Non-Athletic: BWS noted that athletic shoes significantly outperformed with comp declines in the low single digits compared to low double-digits for non-athletic shoes.
Women’s vs. Men’s: Women’s and women’s junior business showing early signs of life at BWS and DSW (sandals) while Men’s remains soft.
Private Label vs. Branded: with private label accounting for half of the BWS’s 21% decline in wholesale, branded shoes continue to outperform. Management also noted BOGO sales more brand centric than price.
BOGO vs. Single Pair Promotions: After disappointing promotions on single pairs, BWS transitioned to BOGO promotions driving traffic higher towards end of Q2.
Lateral Call Outs:
ZQK (+): DC shoes remains ‘very healthy’ at BWS consistent with recent trends in skate.
PSS (+): Saucony key driver in running, which is leading outperforming athletic category at BWS.
SKX (+): women’s and women’s junior business showing early signs of life at BWS, still early.
NKE (+/-): Converse positive at BWS while consumer price sensitivity likely to impact sales of top-line styles.
Company Call Outs:
DSW: Similar to FL, has a new CEO taking over the reins at a low point in the company’s performance:
- Compared to the last call in which MacDonald highlighted 10 opportunities for improvement, with 120 days under his belt, the new CEO appears to be much more focused. Initiatives that will drive assortments, value, and improve the shopping experience in the 2H are the primary focus, anything else has been pushed out until 2010.
- Raising guidance while investing in growth initiatives such as IT projects, BTS marketing/advertising spend, and new store growth suggests a level of flexibility in case trends deteriorate.
- DSW is showing greater discipline in expanding its store base despite greater availability of real estate. While mgmt suggests growth in 2010 will be similar to 2009, we would expect an increase given the improved productivity of newer store formats (since 2007).
- Cash position grows to $179mm ($4/sh) providing DSW with multiple options to grow the business.
BWS: Despite a more stable cost base, uncertainty on the top-line and increased promotions limit visibility in 2H.
- The expectation of positive earnings in Q4 could prove challenging. While management’s view is largely based on gross margin expansion from sourcing benefits, our sense is that management is discounting the potential for a heightened promotional environment by insisting that “it’s not about the price” for consumers, but instead about the brands.
- With inventory levels elevated due to the Eddleman consolidation and a build of athletic product ahead of BTS, margins remain at risk barring a notable pickup in comp trends despite management’s assertion that inventories will be down 3% yy by the end of Q3.
- Nearly all of the comp decline at Famous Footwear was due to lower traffic trends, which improved in the back half of the quarter with the introduction of BOGO promotions. Given their success, we expect BOGOs to continue in order to drive comps and margin pressure to remain as a result.
- Reduction in store base is likely to continue as a key source of savings with expectations for FY09 expense reductions of $40mm up from $30mm earlier in the year.
- Early read from BTS markets is that they are trending positively both in sales and traffic counts after starting 2-weeks later than expected.
- Wholesale to remain weak through 2H with new launches and brand momentum offsetting private label driving improvement in 2010 though too early to tell if there will be growth.