Another Great Season Is In Store For Sporting Goods
We began to develop a theory during the Q4 earnings cycle that is beginning to play out. In our view, the sporting goods stocks that have been rising the wave of social distancing are set up for the second wave of game-changing growth this year. Socially distanced and non-organized, outdoor activities are still going to be a high priority this year and there is the reopening of organized sports to consider as well. Think of all those local leagues that haven’t been in session and all the gear that hasn’t been sold because of it. Those leagues are getting ready to reopen and that is going to drive a wave of demand that has been pent up for over a year. And we are not the only ones who think so.
Bank of America issued a mid-cycle update on the sporting goods industry and its data suggests not only strength but upward momentum in sales. According to them, revenue is on track to grow roughly 40% from last year, 14.5% versus the two-year comp, which is against a relatively easy comp. The fiscal Q1 period saw huge declines across the industry that were later recouped and more. eCommerce continues to be a major driver of revenue with double-digit gains expected at most retailers.
"Our channel checks indicate momentum is being led by team sports equipment including baseball, and football/soccer (due to deferred fall seasons) as well as continued Solitary Leisure momentum with spending across Golf, Campgrounds, and Bikes all still elevated according to BAC card data," the bank says.
DICK’s Sporting Goods An Obvious Winner
Dick’s Sporting Goods (NYSE: DKS) and its competitor Hibbet Sports (NASDAQ: HIBB) are the obvious winners. Both companies have tremendous brand recognition within their operating areas and health eCommerce presence as well. While both offer a great value relative to the broad market the biggest difference between the two is the dividend. Trading at only 16X this year’s earnings the 1.75% yield is attractive and growing. Dick’s Sporting Goods has been increasing the distribution for 7 years and on track for an 8th consecutive increase later in the fiscal year.
The caveat with Dick’s Sporting Goods and Hibbett Sports both is the short interest. The short interest in both stocks is high and running in the 18% range. This has the stock set up for a big fall if the earnings results fail to impress the market but there is a silver lining. There is a possibility heavy short-selling will drive prices lower and open up a buying opportunity either before the report is released or shortly afterward. In either case, we would become buyers of this stock. If not, then the current holders may be in for a vigorous short-squeeze and liquidity event.
Johnson Outdoors Is A Less-Obvious Choice
A less-obvious choice is a company like Johnson Outdoors (NASDAQ: JOUT), a company that makes so much of the camping, fishing, and boating equipment being sold by the sporting goods retailers. Not to mention the demand from the RV industry. Johnson Outdoors also pays a dividend albeit a smaller one, the stock also offers a value at 19X earnings, and it has a very low 1.0% short interest. The company is scheduled to report Q1 earnings later this week and will very likely exceed the analyst’s expectations. Not only are consumer trends still strong, but retailers like Dick’s and Hibbett are struggling to rebuild inventory.
Shares of Johnson Outdoors are pulling back ahead of the earnings report and may move lower in its wake. The move, however, has yet to truly break trend or support so bears are urged to be cautious. For the bulls, if the price action confirms support and/or the trend line, we see this stock moving back up to retest the recently set all-time high and then proceed into the new all-time-high territory. Simply based on the earnings multiple, this stock could be trading another $22 or 15% higher by the time summer rolls around.
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