We've been talking about retail being weak for a while. We've seen re-rating for some of the companies while, others have held strong.
Inventory has been a big issue with retail. Nike still has quite a bit of clean up to do, as does Lululemon, but their heading in the right direction and the Street has been happy with just the effort there.
But not every company is story stock like Nike and Lulu and the sporting goods section will continue to face some pressure in the next few months.
There are five to look at here:
- Foot Locker (FL) - Medium Risk
- Big 5 Sporting Goods (BGFV) - Not a short
- Academy Sports Outdoor (ASO) - Not a short
- Hibbett (HIBB) - Medium Risk
- Dick's Sporting Goods (DKS) - High Risk
Note: Shorting is always tough because we're going against the natural grain of the market so I'll never give any short a low risk rating.
Macro Thesis:
- Sporting Goods are discretionary spending so they will see a decline in demand with the tightening of monetary policy
- Overall spending on goods have decreased and so has spending on sports equipment.
Company Fundamentals:
- Sales Growth: As far as the company fundamentals are concerned the slowdown is definitely affecting sales growth for each of these companies, as you can see from the chart below.
- Inventory and Margins: The other issue remains the inventory overhang. We know that Nike, Lulu, Walmart all had issues with excess inventory. In fact, they are still dealing with those issues. As the companies try to clear the excess inventory, they're having to discount products and therefore, taking a hit to their gross margin. You can see as well, in the chart below how margins have been declining.
- Decline in Footfall: Brick-and-mortar stores were doing poorly prior to the pandemic. There was quite a lot of worry about declining footfall. During the pandemic, this obviously didn't change but many of these companies got a boost from online purchases. Soon after, people just wanted to go out and therefore, there was a ramp up in footfall. But now, we're going back to the pre-pandemic era of fewer people going out shopping. Maintaining stores means additional overhead costs and labor expenses. This puts pressure on the bottom line.
- DTC - Direct to Consumer: Nike has made a huge shift to online ordering and direct-to-consumer sales cutting out the middleman such as these sporting goods stores. Foot locker has borne the major brunt of this and it's only a matter of time before more manufacturers start to employ this policy.
Foot Locker (FL) - Medium Risk
Foot Locker is a medium risk short here. The company has been putting up earnings decline for the last 5 quarter and Revenue decline for the last 3 quarters.
The weekly chart has also put in a bear flag. I would look at shorting this at $43.50 with a first profit target at $37 and second profit target at $30.
Big 5 Sporting Goods (BGFV) - Not a short - Earnings: 02 May 2023
BGFV would have been the best candidate to short because it has the worst fundamentals but the company already has a very high short interest. They have a small float and with the high level of short interest, there is always the potential for a squeeze. So I would stay clear of this one.
Academy Sports Outdoor (ASO) - Not a short - Earnings: 06 Jun 2023
ASO's fundamentals are actually quite decent. Although, I think that they will feel some of the macro and industry pressure, they are managing quite well. Even their chart is beautiful for a long position, had we caught it about $10 lower. It's currently trading at $64 and I would've loved to have bought this somewhere in the low 50s.
Hibbett (HIBB) - Medium Risk - Earnings: 02 May 2023
Hibbett was founded in 1945, and engages in the provision of sporting goods business. Its stores are operating under the Hibbett Sporting Goods and City Gear banners and an omni-channel platform. As of January 2023, they operate 1,133 stores across the US.
This is yet another one to consider for a short. On a weekly, the chart has put in a bear flag. I also don't like the deteriorating fundamentals. The company's estimates are higher for the coming year but, I believe these will have to be revised downward.
I would look at shorting it here around $62 with the first target at $54 and the second at $46.
Dick's Sporting Goods (DKS) - High Risk
DKS is tough one to short. It announced an increase in their dividend during their last earnings, and guided positively, which cause them to gap up and fly. But, I think they're being overly optimistic about their earnings and they will probably have to revise their guidance downwards.
They're seeing a major decline in Gross Margin but, they are still a story stock. They've taken measures to clear inventory as much as possible and this will further weigh on their margins but, I think people like to trade this name and I would not look to short this unless you are very brave and have tight stop losses in place.
Closing Thoughts:
Foot Locker (FL) and Hibbett (HIBB) are both potential shorts
Please remember to put stop losses in place if you decide to take these trades. (3% to 5% above the price you're shorting at)
These trades are swing trades based on the macro and fundamentals so it's likely to play out in 1 to 3 months.
None of the above is investment advice. I have no position in any of these companies but, I may initiate a short position 3 trading days after the publication of this article.