Sporting Goods Retailers
Date February 2019
- For the year-to-date period ended October 2018, retail sales at U.S. sporting goods stores were down 4.1% over the prior year indictaing lower demand for the industry overall
- Sporting goods stores’ revenue is anticipated to grow at an annualized rate of 1.9 percent over the next five years, while the U.S. sports participation rate is expected to increase 2.7% over the same period
Approximate net recovery on cost
The gun debate meets retail sporting goods: After a February 2018 shooting at a Florida high school killed 17 people, industry leader Dick’s Sporting Goods and the company’s adjacent Field & Stream concept made a controversial decision — to raise the minimum age for firearms purchases and to cease the sale of AR-15 style weapons (“sporting rifles”) and extended magazines in its stores. The company saw a mix of customer praise and backlash immediately following the announcement. For the period ended November 3, 2018, the company’s net sales decreased 4.5 percent to approximately $1.86 billion. Adjusted for the calendar shift due to an extra week in 2017, consolidated same store sales decreased 3.9 percent driven by challenges to its hunting business following the change. While management initially reported that the adjusted firearms policy attracted new customers, sales were reported as flat through August, and the company has now warned that “negative reaction” could affect future results. To offset lost sales and continue to strengthen its profitability, Dick’s has committed to growing its private label businesses and transitioning into other high-margin categories, including baseball and other sporting goods.
Despite lower topline sales, cost efficiencies and higher gross margins achieved in non-hunting categories (a typically low-margin category) helped the chain increase profit 2.5 percent per reporting as of November 3, 2018. The company continues to invest in new stores, opening six in the third quarter, and maximizing the company’s e-commerce business, where sales increased 16 percent for the same period. Dick’s remains hopeful that the decision to amend its gun policy will not erode sales long-term. Time will tell if consumers support the new policy or if the loss of firearm and hunting sales to the competition is too great a financial consequence.
Growth of athleisure benefits the industry: Due to the rising interest in health and fitness, more people are looking to purchase sporting goods and related products including athletic and workout clothing, yoga materials, and gym equipment. Per IBISWorld, the sports participation rate is expected to grow 2.7 percent over the next five years, while the sporting goods industry itself is expected to grow at an annualized rate of 1.9 percent over the same period. As American’s apparel preferences move further toward the casual side, athleisure clothing has seen a rise in sales, benefiting retailers stocking popular brands such as Nike, Adidas, and Under Armour, as well as specialty retailers like Lululemon, which posted a comparable store sales increase of 17 percent for the third quarter of 2018, and Athleta, which is expected to generate positive comps for the fourth quarter of 2018, while significantly outperforming its sister brand Gap.
In line with a growing trend toward renewable and up-cycled products, several major companies have made strides to go “green” recently, a concept that has gained popularity and praise from consumers. The North Face recently launched its refurbished clothing line, The North Face Renewed, which recycles returned and defective products and resells them online at a discounted price. Competitors like Patagonia and REI have taken similar steps. Patagonia has its own reused gear site, as does REI, which also regularly hosts “gear swaps.” Participation in green initiatives gives retailers a marketing advantage as the green movement takes on momentum and can also be a profitable business decision. Selling discounted products that would have otherwise been returned or destroyed adds a revenue stream by appealing to both the environmentally aware consumer choosing to go green as well as to the aspirational consumer who would have otherwise not made a purchase.
Changing tastes and seasonality impact recoveries: The popularity of various sports has changed in the last decade. According to the latest State of the Industry Report by the Sports & Fitness Industry Association, the fastest growing sport is bicycling (BMX) with an increase in participation of 13.3 percent over the past three years. Other top-growing sports include cardio tennis, triathlon, cross country skiing, pickleball, rugby, hiking, trail running, cross-training style workouts, and stand-up paddling. As consumers’ tastes for sporting activities change, a corresponding change in demand for the associated equipment and gear can be expected. Another category affected by outside factors is firearms. After back-to-back sales increases in 2015 and 2016, demand dropped in late 2016 and 2017 as post-election fears of stronger gun control regulations subsided. Consequently, firearm sales were depressed in a Gordon Brothers’ going-out-of-business sale in the sporting goods space during that timeframe, reflecting lower consumer demand. Looking forward, retail firearm and ammunition revenue is forecasted to increase at an annualized rate of 1.8 percent from 2018 through 2023.
The performance of national sports teams can also have a significant effect on retail sales in localized geographies. Double-digit regional sales increases can be seen following national sporting events such as the NFL Super Bowl and the MLB World Series. This coupled with the seasonality of various sports are primary drivers of gross recovery values for sporting goods. Retailers stocking wide assortments of seasonal gear must carefully manage inventory levels to sales volumes to maximize value. To the extent that seasonal or slower-moving inventory is not managed effectively as part of the normal course of business, it may become challenging to sell through in an off-season liquidation event, resulting in lower gross recovery values in certain categories. Gordon Brothers recommends that lenders partner with appraisers in requesting annual seasonal models to address swings in net recovery values and their potential impact on availability.