3 Sporting-Goods Retailers That Should Be in Play


Although the recession is receding from memory, sporting-goods retailers report that some consumers remain skittish, cautious, careful -- even absent from their stores. But they are taking on this challenging environment successfully and growing sales year over year with disciplined cost management which is leading to substantial increases in net income.

Today we review the full-year 2013 performances of three sporting-goods retailers: Dick's Sporting Goods , Cabela's , and Big 5 Sporting Goods .

A better-than-forecast fourth quarter
Dick's Sporting Goods stores carry brand name sports equipment, apparel, and footwear. At year-end 2013, the company operated 558 Dick's Sporting Goods stores and 87 Golf Galaxy specialty stores.

Photo credit: Ben Earwicker and stock.XCHNG

Net sales for the full year ended Feb. 1 were up 6.5% to $6.2 billion. Consolidated same-store sales grew less than 2% year over year. Most of the sales increase was due to revenue from new stores: Forty one new stores were opened, or an increase of nearly 7% in its store base.

The company ended the year on a very positive note; fourth-quarter consolidated same-store sales rose 7.3%, well above management's stated expectation of a 3% to 4% increase.

On the expense side, both cost of goods sold and selling, general, and administrative expenses as a percentage of sales held steady from 2012. In turn, the sales increase led to a 16.1% increase in net income.

Gun sales go out not with a bang but a whimper
Cabela's primary markets are individuals who enjoy hunting, fishing, and camping. A leading specialty retailer, Cabela's is also the world's largest direct marketer of merchandise in these categories through its e-commerce and catalog sales.

Photo courtesy of stock.XCHNG

For full-year 2013, Cabela's reported double-digit increases in both revenue and earnings per share -- the fifth consecutive year the company has achieved these milestones. Revenue was up 15.6% to nearly $3.6 billion. The cost of revenue as a percentage of sales dropped by more than 40 basis points, as customers were drawn to its higher-margin corporate-brand products. Selling, distribution, and administrative expenses similarly declined as percentage of sales.

As a result of the significantly higher sales and efficient cost management, the company reported an impressive 29.3% increase in net income.

As good as these results were, they could have been even better were it not for a precipitous drop in gun and ammunition sales during the fourth quarter; holiday sales were below the company's expectations. These factors combined brought about a 10.1% decline in fourth-quarter comparable-store sales compared to the year-ago quarter.

A textbook example of skillful cost management
Big 5 Sporting Goods' strategy is to concentrate on the sporting-goods retail market in the Western U.S. The company operated 429 stores in 12 states as of year-end 2013. The company's merchandise mix includes athletic shoes, apparel, and accessories along with equipment for a broad range of sports (camping, hunting, fishing, golf, tennis, and team sports).

Big 5 reported solid results for 2013. Net sales rose 5.6% over 2012, and same- store sales were up nicely as well, a 3.9% increase.

Like Cabela's, Big 5 was able to lower both its cost of sales and selling and administrative expenses as a percentage of sales. These savings combined with the sales increase brought about an exceptional 87.4% increase in net income.

What we learned
There is an issue in 2014 that these three companies must face. Considering that results were so favorable in the last year, quarterly comparisons -- in terms of percentage growth -- may not look as fabulous.

Big 5's CEO Steven G. Miller pointed out in the earnings release that he expects a "very challenging first quarter of 2014." This is because firearms and ammo sales surged in last year's first quarter, so this year's quarter may pale in comparison. He said same-store sales are likely to drop by a high single-digit percentage for the quarter compared to 2013. The good news is that the company is positioned to return to positive same-store sales comparisons for the rest of the year.

In 2014 Dick's expects consolidated-store sales to increase 3% to 4%, significantly higher than 2013's 1.9% increase.

Dick's diversified mix of products allows it to call itself "the largest U.S. based full-line omni-channel sporting goods retailer." This is key to its strategy because different sports have varying growth rates in participation; Dick's can manage its merchandise mix to take advantage of the sectors and products that are the hottest. Also, many consumers participate in more than one sport or have family members who do. Dick's can meet their needs for, say, running shoes and also golf clubs.

Cabela's outlook is brightened considerably by the way its "next generation" stores are performing. In the fourth quarter, these stores' sales and profit per square foot were more than 50% higher than the older legacy stores. Chief executive Tommy Millner said in the earnings release that the company intends to open 14 new stores in 2014. That may not sound like a big increase, but it's on a base of around 50 stores that were open at year-end 2013.

Investors can certainly make a compelling case for Cabela's. At the ICR XChange Conference in January, Millner said that Cabela's has the potential to have 225 stores in North America.

Dick's also has ambitious growth plans. The company will be opening new prototype stores of various sizes. Some of them will be small enough to be placed in smaller markets and mini shopping centers, increasing the potential number of stores. Management has set a goal of reaching $10 billion in sales by year-end 2017.

Big 5 should not be overlooked. The company has made great progress in improving its operating margin, which dipped to a low of 2.8% in 2012 but rebounded by more than 200 basis points in 2013.

So, all three are good companies to watch for investors who remain bullish on retail.

Boost your 2014 returns with The Motley Fool's top stock
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

The article 3 Sporting-Goods Retailers That Should Be in Play originally appeared on Fool.com.

Brian Hill has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.