As Dick's Sporting Goods Falls 17%, Expect More of the Same from Retail

A few retailers are doing ok on "not as bad as terrible expectations," but as I keep repeating, anything levered to the US consumer is asbestos in your portfolio. This sector has rebounded smartly on the "2nd half recovery" thesis along with the "rebate checks will save everything" thesis (even though most of that rebate check is now going to food or gas). I wrote on the weekly earnings roundup

Dicks Sporting Goods (DKS) - This is a Wall Street favorite this is exactly the type of product that a poorer America will have to cut back spending on. Maybe not this earnings period, but over the next year, much of the growth in this name will be new store expansion; but I could see same store sales beginning to deteriorate the higher food and energy prices go.

The problem with investing in anything to do with the US consumer is one day you could wake up and gets your Dicks [Sporting Goods] (DKS) handed to you (down 17% as I type this). Folks, analysts (and many companies) continue to live in a fantasy world and their 2nd half earnings estimates are far too high. Further, MANY of these companies are now showing year over year earnings reductions - yet the stock prices go higher each time the Kool Aid is brought out and the "2nd half recovery" is discussed - so people are paying more for less (earnings). More for less? Doesn't sound like something I'd like to buy.

Everyone is drinking the Kool Aid of a 2nd half recovery. But Dicks Sporting Goods is the perfect example of discretionary spending that is no longer an option for many Americans as inflation (that does not exist to the Federal Reserve) eats away at them. Frankly, things like golf is a luxury many in the middle class will need to cut back severely on, or be done with. That's going to be reserved for people in countries like China or Dubai, as the wealth in the world shifts from debtors to creditors/those with natural resources.

• Same-store sales fell 3.8 percent for Dick's Sporting Goods stores and 7.4 percent on pro forma basis for Golf Galaxy.
• Dick's Sporting Goods Inc. on Thursday slashed its fiscal full-year earnings prediction and issued a second-quarter forecast under Wall Street's expectations
• For the full-year ending in January 2009, the sporting equipment and apparel retailer now expects to earn between $1.22 and $1.36 per share, compared with a previous expectation of $1.49 to $1.54 per share. The company earned $1.33 per share in the 2007 fiscal year. (so at TODAY's guidance they will be lucky to show 0% earnings growth, but by the time we get to December 2008 I predict they will be lower than $1.22 - it will get worse from here)
• Analysts polled by Thomson Financial expect a profit of $1.50 per share. (oops - Kool Aid)
• For the second quarter ending in July, the company expects to earn 34 to 38 cents per share. Analysts, on average, expect the company to earn 43 cents per share. (oops - Kool Aid)
• Same-store sales at Dick's Sporting Good's locations are expected to fall about 3 percent to 5 percent compared with the prior year, the company said.

Petsmart (PETM) which I wrote

PetSmart (PETM) - we'll know things are bad if we start seeing sustained issues here - for many people their pets are like kids; so if they cut back spending on this category in their budget you know they are truly stressed.

Looks like they are suffering, but people will give up golf before their pets - and they actually admitted there is inflation (this is why you ignore government reports and listen to companies) They are still clinging to their full-year forecast, but lowering 2nd quarter... which means to make their full year number they need even bigger numbers in (drumroll) the 2nd half of 2008. So we know what that means. They are going to miss the 2nd half numbers. We'll check back later in the year to see this play out.

• Revenue rose 9 percent, to $1.2 billion from $1.11 billion, as greater customer traffic partly offset the effects of inflation, and pet services sales rose 22 percent, to $130.4 million. Same-store sales, or sales at locations open at least one year -- a key measurement of retailer health -- grew 2.9 percent.
• Pet products supplier PetSmart Inc. on Wednesday reiterated its full-year forecast, but gave a second-quarter profit outlook that fell short of analyst estimates.
• "Our top line performance for the quarter came in a bit higher than expected and was helped by an increase in inflation partially offset by continued weakness in traffic," Phil Francis, PetSmart's chief executive, said in a statement.

Last, since we need some sunshine we mentioned The Buckle (BKE) along with Aeropostale (ARO) as companies doing well as even teens trade down.

2 retail names that have been doing well on the clothing side - Aeropostale (ARO) and Buckle (BKE) - excellent charts and these seem to be winning business from the American Eagles (AEO) and Abercrombies (ANF). However, with high stock prices and high expectations comes a lot more risk around earnings period.

I wouldn't buy any retailer except Walmart (WMT) in this environment, but gun to head these names along with Urban Outfitters (URBN) seem to be the only clothing stores that are showing real growth.

• Teen apparel retailer The Buckle Inc. on Thursday said fiscal first-quarter profit rose 54 percent, on a surge in same-store sales.
• Earnings for the quarter ended May 3 rose to $18.7 million, or 61 cents per share, compared with $12.2 million, or 40 cents per share last year.
• Revenue rose 32 percent to $160.3 million from $121.1 million last year.
• Same-store sales, or sales in stores open at least one year grew 25.6 percent

So we have pockets of strength but buying into retail right now, you are simply looking for the few good houses in a very bad neighborhood.

I cannot short individual names, but I would if I could; instead I'm stuck with Ultrashort Consumer Services (SCC) [Apr 3: Jobless Claims Break 400K for the First Time this Cycle] which has Walmart (WMT) and McDonalds (MCD) as its top 2 holdings; 2 companies I believe will prosper in the pooring of America. But this is all I have to play the trend, so it is what it is.

Now if patterns repeat, in about 2-4 weeks after the retailers, financials et al get pummeled - the hedge fund computers will pile back into them. CNBC will trot out how well they are doing and "this clearly signals the bottom is in", and "it's time to buy early cycle names ahead of the recovery". This has been the same dog and pony show they've been trotting out every 6 weeks for the past 3/4 of a year. So when you hear it, just remember this post and try not to snort your drink up your nose when you hear it - for the 11th time.

Disclosure: Long Ultrashort Consumer Services in fund; no personal position

Comments

[RBellamy976]

Have you shopped at "Dick's" lately??

Understaffed, employees are less than knowledgable compared to other sports stores, under-trained, rude employees, empty shelves, Dick's Sporting Goods is in trouble- in a business that is defined by "service" and knowledgable "up-selling" Dick's is the worst of the worst. Their business model is destine for failure.

[DanielJacome]

We got smoked on DKS -- our EPS estimates were too high, too -- wish we had stress tested our EPS assumptions and modeled oil prices better.

Live and learn.

[John Winger]

When you make mistakes like this you lose credibility:

"Revenue rose 9 percent, to $1.2 billion from $1.11 billion, as greater customer traffic partly offset the effects of inflation"

Go back and re-read the transcript. Traffic was down not up and inflation helped the top-line because they were able to pass along the increases. Not trying to be a dikk, just thought this was a sloppy mistake. Cheers