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Up 113% -- and just getting warmed up
Coaches hope players give 110%, but the sporting-goods retail sector gave even more over the past year. There's still room to grow, for some. Here are my 3 first-string picks.
By Robert Walberg
Baseball is back, college basketballs March madness is just around the corner and Tiger is tuning up for the Masters. To this sports fan, that means we are about to begin the most exciting few weeks on the sports calendar. And perhaps thats a good time to review sporting goods retailers.
Considering its performance over the past year, the sporting-goods group is the retail equivalent of the Bronx Bombers. The average gain posted by the group was an eye-popping 113%, with Big 5 Sporting Goods (BGFV, news, msgs), Dicks Sporting Goods (DKS, news, msgs), Hibbett Sporting Goods (HIBB, news, msgs) and The Sports Authority (TSA, news, msgs) posting gains of 140% or better. Of the six stocks in the group, only Galyan's Trading (GLYN, news, msgs) struck out, losing 13.6% during the period.
Consistently strong same-store sales numbers, modest expansion, relatively attractive valuations and better-than-expected earnings growth have all contributed to the bullish tone. But can the sector continue to knock the cover off the ball in the months to come?
Still room to bulk up
Though valuations are no longer as compelling, in most cases they arent alarming -- especially on a price/sales basis. More importantly, if the companies can deliver on their estimated earnings growth rates, currently averaging 18%, they should have no trouble delivering another all-star performance in 2004.
While estimates are often overly optimistic, investors should take comfort in the fact that, unlike most retail groups, the sporting goods market is relatively unsaturated, with the six major chains totaling 1,300 stores nationwide. That leaves plenty of room for relatively rapid revenue growth for not only quarters, but also years to come.
Now that we know that the broad climate for the group is positive, lets take a closer look at the actual stores and their operating philosophies to determine which companies are the true stars, and which merely enjoyed career years last year. From shopping, talking to customers, reviewing Web sites and analyzing management teams, I think that the delineation between the A-team and the B-team is pretty clear.
| The players | | Company | Price | % chg 12 Mos. | Est. P/E | Price/sales | Est. 5-yr growth | Stores | | Sports Authority (TSA, news, msgs) | $42.36 | 140% | 20.4x | 0.77x | 15% | 385 | | Hibbett (HIBB, news, msgs) | $35.62 | 143% | 27.8x | 1.79x | 20% | 378 | | Big 5 (BGFV, news, msgs) | $25.67 | 177% | 17.0x | 0.82x | 15% | 294 | | Dicks (DKS, news, msgs) | $59.29 | 161% | 28.6x | 0.99x | 18% | 163 | | Galyans Trading (GLYN, news, msgs) | $8.94 | -14% | 34.4x | 0.23x | 18% | 44 | | Sports Chalet (SPCH, news, msgs) | $11.93 | 69% | 18.1x | 0.32x | 20% | 31 |
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Dick's leads the first string
The top player in this field is Dicks Sporting Goods. Its stores are a sports enthusiast's dream. They are well-organized, amply stocked with top-line merchandise and pleasing to the eye. Their departments within the store are also well conceptualized, and the corresponding sales staff knowledgeable. With 163 stores dotted throughout the East, Mid-Atlantic region and the Midwest, Dicks has plenty of room for future growth. At 45,000 square feet, its stores are also a good size -- big enough to provide a broad offering of sporting goods without being so big as to be off-putting.
Another well-run operation of similar size is Sports Chalet (SPCH, news, msgs). This small, underfollowed (only one analyst provides estimates) chain has about 30 stores throughout Southern California and Nevada. Though it provides the usual assortment of running, basketball, baseball, tennis and golf gear, the stores are well-known for providing expert service to more specialized sports markets such mountain climbing, kayaking, skiing and scuba diving. Though Ive never been in one of the stores myself, consumers who frequent the place say they love it.
Obviously, the company has room to grow, though it is competing directly with Big Five, as well as indirectly with Wal-Mart (WMT, news, msgs) and Target (TGT, news, msgs). Nevertheless, if it maintains its commitment to service and its focus on the more specialized sports, the company should continue to meet with success.
The final chain that makes my A-team was in a slump last year. Thats right -- Galyans. These 80,000 square feet megastores are a little slice of heaven on earth. They have rock-climbing walls and boast foosball tables set up for customers to use. They sell virtually every imaginable sporting good and accessory. If there is a problem, it might be that the stores are a little too big. Theyre overwhelming to some shoppers, not to mention expensive to operate.
Where the stores succeed, other than in breadth of merchandise, is in creating an organized, friendly, pleasing shopping environment -- and thats a much harder thing to get right than size. Consequently, look for Galyans to break out of its slump and post big numbers over the next 12 months. Investors should also note that unlike its competitors, Galyans will benefit from relatively easy comparison periods -- and with only 44 stores nationwide, the company has ample room to grow.
Three stuck on the bench
The losers are Big Five Sporting Goods, The Sports Authority and Hibbett. Operationally, these stores all score relatively high grades, as theyre posting solid top- and bottom-line growth driven largely through expansion and modest same-store sales growth. Of these, Hibbett was the toughest decision because its regional, small-market approach has served it very well. However, as the company begins to run into competition, its uncharacteristically high operating margins are likely to come under pressure. That could lead to some earnings disappointments down the road.
Both Big Five and Sports Authority suffer relatively high debt burdens, and both will have trouble maintaining their pace of expansion. They are the closest to being fully stored.
Additionally, all three stores have another common hitch in their swing: an uninspiring warehouse approach to retailing. The merchandise is stacked high in the typical retail format, with no specialty shops within the bigger stores and no real eye-catching appeal to the layout or (consequently) the merchandise. The stores are also much smaller, typically ranging anywhere from 5,000 to 20,000 square feet.
Living large with room to grow
Generally speaking, in todays retail environment, bigger is better -- just ask all the small hardware store owners run out of business by Home Depot (HD, news, msgs) and Lowe's (LOW, news, msgs). In the era of Barry Bonds, Sammy Sosa, Mark McGuire, Tiger Woods, Ernie Els, John Daly, Shaq, Yao Ming and Serena Williams, is there any doubt that bigger is also going to be better over the long-run?
I dont think so, which is why my A-team is made up of the companies with the biggest stores in terms of square footage, and yet the smallest number of total stores. It also helps that they have strong growth prospects, low price/sales ratios and sound financials.
Editor's Note: At the time of publication, Robert Walberg did not own or control shares in any of the stocks mentioned in this column.
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