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Sporting Goods Stores May Outperform: Big 5 Sporting Goods Corporation (BGFV), Foot Locker, Inc. (FL)

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We are approaching the earnings dates for several sporting goods retailers, companies that may well be poised to beat expectations. Despite retail stocks having lagged the broader market somewhat of late, this could be an opportunity to benefit from the upside potential of one or two players in this particular niche. The companies have positive earnings pictures and are well-positioned for further expansion of their store bases. Some are targeting productivity, while others are building the store base. They also have relatively debt-free balance sheets, giving them the resources to make capital investments. Here are the stocks I suggest you purchase.

Big 5 Sporting Goods Corporation (NASDAQ:BGFV)Big 5 Sporting Goods Corporation (NASDAQ:BGFV)

The operator of more than 400 units will report fourth-quarter earnings on Feb. 26. In January, management announced preliminary sales that were 6.5% higher on a comparable-store basis. It also said share earnings fell in the range of $0.17 to $0.19, versus a breakeven tally the prior year. For all of 2013, the company expects to achieve earnings of between $0.67 and $0.69 a share, as compared with the 2011 mark of $0.53.

The solid upturn in profits can be attributed to alterations in the merchandise mix supporting store traffic. In terms of product lines, hard goods have been generating the sharpest increase in demand, followed by apparel and footwear. Meantime, margin expansion is stemming from the rising customer numbers, as well as slightly increased merchandise margins. In all, trends look to be in the right direction.

Big 5 is present in 12 western states. It added eight locations during 2012, for a total of 414 at year-end. Controlled growth in the store base is allowing it to realize improved returns on assets and on invested capital. BGFV shares have upside price potential. Their $0.30-a-year dividend is another plus.

Foot Locker, Inc. (NYSE:FL)

The sneaker and sportswear giant will post results on March 8 for its January quarter. Earnings were stellar in the October period, climbing an outstanding 47% (See my November blog). The likelihood is that several of the same factors that boosted that period’s income helped it again in the January interim. In particular, sales and productivity jumped on demand for basketball shoes. In fact, sales per square foot have been on the upturn, fueled by the closure of less productive locations and relocations.

The top gainers in same-store revenues among FL’s brands have been Kids Foot Locker, Champs Sports, and domestic Foot Locker. Elsewhere, Europe, where it is adding locations, and Lady Foot Locker, have struggled a bit. Analysts believe earnings were $0.72 a share in the January quarter, reflecting a $0.17 advance. For 2013, the efficiency measures should have a continued positive effect on profits. If fashion trends remain favorable, Foot Locker ought to also benefit on the bottom line from the product margin widening.

In all, sales growth without an increasing base of stores is a recipe for positive earnings gains. Foot Locker has revived its business through this strategy, and the stock could thus still have near-term appreciation potential. Like BGFV, it too offers a yield around 2%.

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