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Retail Earnings Remain Mixed With Sports And Books

Posted: Aug 24, 2009 11:05 AM by James Brumley

Tickers in this Article: FL, BAMM, DKS, HIBB, BKS

With the last of this week's retailer earnings reports being posted, we continue to see what we've seen all season long - hit and miss results, which continue to separate the leaders from the laggards. With this particular look, we get to pit direct competitors against one another in head-to-head earnings duels. The arena? Sporting goods, and books.

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Dick's and Hibbett
All things considered, it wasn't a bad quarter for Dick's Sporting Goods (NYSE:DKS). The company saw a 2.5% dip in earnings, but a 4% improvement in Q2 sales. Conversely, Hibbett Sports Inc. (Nasdaq:HIBB) was something of a disaster last quarter. A 5.5% decline in total revenue led to a 77% plunge in profits. How can two similar companies yield strikingly different results? As a Hibbett spokesperson said, the retailer experienced "significantly more gross margin degradation than anticipated". (Take a deeper look at a company's profitability with the help of profit-margin ratios The Bottom Line On Margins.)

Though it's not the only possible reason for "degraded gross margin," tight inventory management is crucial to gross margins, especially when sales are slumping. Almost every retailer that improved margins and/or profits last quarter cited stronger merchandise management as one of the keys. Not that the company didn't do it internally, but in none of the post-earnings interviews with Hibbett's management were the words 'inventory management" uttered. It begs the question: is Hibbett's running its inventory as effectively as its competition?

Foot Locker
While not a true apples-to-apples competitor, Foot Locker Inc. (NYSE:FL) jumped in the game with a second-quarter earnings miss. Thanks to cost cutting, the shoe/apparel store at least broke even despite a 12.1% dip in same-store sales. The problem? Analysts were looking for a profit of six cents per share. Foot Locker's shortfall verifies a very specific problem.

Dick's, which sells a very wide variety of sports equipment and apparel, did pretty well during the second quarter in terms of revenue. And all of Hibbett's product lines did as well as expected, save one: footwear. This can explain Foot Locker's struggles last quarter.

Analysts think - and reasonably so - that the "fashion side" of sports equipment (shoes and apparel) is still suffering from the recession. Yet, sporting goods themselves - which is most of Dick's products lines - may not be quite as economically sensitive. Just something to keep in mind if the recovery takes longer than expected.

Booksellers
As for booksellers, how is it possible for two companies in the exact same business to end up with such radically different results? Barnes & Noble, Inc. (NYSE:BKS) saw a 20% decline in net income thanks to a 5% dip in revenue. The company's earnings per share came in at 14 cents, beating estimates by four cents, and same-store revenue was off by 6.9%. Profits and sales were all better than expected, but still unimpressive.

You'd think Books-A-Million Inc. (NYSE:BAMM) would follow in the same path, but it didn't. Earnings were higher by 134% during Q2 for BAMM; total sales were only down a hair, but same-store sales were down 4.9%. While the reasons for the disparity were not explicitly validated by either company, a couple of things may have been in play here. First, though not promoted as such, Books-A-Million offers more of a "discounter" feel. Books-A-Million patrons can still get the coffee shop experience through the Joe Muggs eateries set up in Books-A-Million's shops, but it's not the focal point the way it may be at other bookstores trying to deliver an "experience" rather than sell books. Though the rationalizing may be completely unmerited, perhaps Barnes & Noble just feels like a little too much of a guilty pleasure during a recession.

The Bottom Line
Retailers continue to deliver mixed earnings, even within the same indsutry. Between Foot Locker's and Barnes & Noble's results, it's relatively clear the consumer isn't feeling totally confident just yet.

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By James Brumley

James Brumley is a freelance writer and registered investment advisor. He began his career as a broker with a major Wall Street firm, where fundamentals and long-term holding periods were core strategies. After that, he switched gears completely, becoming an analyst at a short-term trading newsletter that focused on technical analysis. He now manages client money using the best of both philosophies. His company, Bluegrass Portfolio Management, offers investors an opportunity to reap superior returns with minimized risk.

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