Dicks Sporting Goods Inc (DKS), Hibbett Sports, Inc. (HIBB): Sporting Goods Weak…Weather to Blame?

After performing well since the Great Recession, sporting goods retailers posted weak same-store sales for the first quarter. Let’s take a look at the performance of Hibbett Sports, Inc. (NASDAQ:HIBB) and Dicks Sporting Goods Inc (NYSE:DKS).

Hibbett Sports

Hibbett Sports has performed exceptionally well during the past five years, with shares up over 170% (shares are up less than 3% during the past year, however). Even though the company continues to open new stores, the company’s first quarter fell short of consensus estimates. Revenue grew 3% year-over-year to $240 million, while earnings increased just 2% year-over-year to $1 per share.

Hibbett Sports, Inc. (NASDAQ:HIBB) has pursued an interesting strategy of locating its stores near Wal-Mart Stores, Inc. (NYSE:WMT) locations, limiting the need for the company to invest in traffic-driving initiatives. It is possible Wal-Mart’s weak first quarter may have been a driver of Hibbett Sports, Inc. (NASDAQ:HIBB)’s weak same-store sales growth of 0.8%. Consistent with what we’ve heard from the entire retail spectrum, the firm blamed weather for not only weak same-store sales, but also for slight gross-margin deleveraging. Margins declined 10 basis points to 37.9%, and according to management, lower-margin winter clothing dragged down margins.

On the other end of the cost spectrum, SG&A as a percentage of sales increased 40 basis points year-over-year to 18.8%, mostly attributable to higher labor costs and medical claims. The combination of lower gross margins, higher fixed costs, and weak sales growth is a recipe for disaster in the retail world, but we at Valuentum think this could be more of an aberration than a trend. Not only was the company facing a difficult comparison (same-store sales were up 8.6% in the first quarter of fiscal year 2013), but we think weather is a driving factor for sporting goods retailers. We think some demand will be pushed into the second quarter, and we also believe NIKE, Inc. (NYSE:NKE)’s Jordan has an excellent release schedule for the back half of calendar 2013 that will help drive traffic.

The firm didn’t waver in its full-year earnings guidance, reiterating its outlook of $2.85-$3.05 per share with same-store sales in the low-mid single digits. The company intends to expand its store footprint by 6-7% on a square footage basis. Nevertheless, we think shares look fairly valued at this juncture.

Dicks Sporting Goods

Dicks Sporting Goods Inc (NYSE:DKS) was able to meet bottom line expectations, but sales fell short of estimates when the company reported first quarter results Tuesday morning. Revenue grew 4% year-over-year to $1.3 billion, but earnings increased 7% year-over-year to $0.48 per share. Free cash flow was negative by over $100 million.

Although growth from the larger store base was solid, same-store sales were a disaster, falling 3.8% on a consolidated basis when adjusted for the calendar shift. Like Hibbett Sports, Inc. (NASDAQ:HIBB), Dicks Sporting Goods Inc (NYSE:DKS) faced a difficult comparison of 8.4% growth during the same period last year. However, when we look at the unconsolidated results, we can clearly see that Golf Galaxy drove the weakness, as its same-store sales declined 11.8% during the quarter (compared to a decline of 3.2% at Dicks Sporting Goods Inc (NYSE:DKS)). Last year’s unseasonable warm spring weather pushed forward the golfing season, whereas this spring’s unseasonable cold weather delayed the start of golfing season. Management explained that golf, baseball, outdoor activities and continued struggles with the Livestrong fitness equipment brand weighed on results.

Online competition remains a large threat, but we truly believe sales weakness from Dicks during the first quarter was largely weather related. In aggregate, weather should have no impact on long-term results, but it can cause a great deal of short-term volatility—especially for sporting goods companies. Of course, this could also negatively impact Under Armour Inc (NYSE:UA), which relies on Dicks Sporting Goods Inc (NYSE:DKS) for as much as 1/3 of sales and does over 85% of its business in North America. NIKE, Inc. (NYSE:NKE) and Adidas, on the other hand, are global titans that can deal with some weakness in any given market.

In spite of weak sales, we think the company did an excellent job of mitigating higher SG&A, which increased just 30 basis points year-over-year to 23.4%. Gross margins were marginally higher than a year ago at 30.9%, but the firm is focusing on lowering clearance as a percentage of sales. Success on this initiative would have a positive impact on gross margins, but executing on this strategy could prove difficult.

With an aggressive policy to return cash to shareholders via buybacks and dividends, as well as a long runway for store growth, we see no reason why one poor quarter should alter our valuation for the company. However, we do not think shares offer a sufficient margin of safety to establish a position in the portfolio of our Best Ideas Newsletter.