Weakness in Dick’s first-quarter results and second-quarter outlook was attributed to golf, primarily, and to hunting, which is a smaller part of the company’s overall business in the first half of the year.
Comments on the conference call from CEO Ed Stack that Dick’s hunting business experienced a high-teens comp decline in the first quarter were not particularly surprising from our standpoint. What was unexpected was the comment that this business could have a similar rate of decline in the second quarter.
It is understandable that investors are taking Dick’s comments as a read-through for second-quarter trends at Cabela’s and Sportsman’s Warehouse. The concern is that comp store sales have been expected to improve for both companies in the second quarter compared with the first; specifically, Cabela’s management guided to a lowdouble- digit comp decline in the second quarter, versus a 22% comp decline in the first quarter.
We believe there are several important aspects to sales mix that affect these three companies differently. Last year, Dick’s stopped selling modern sporting rifles after the Newtown, Connecticut, tragedy, so the company did not experience as strong an uplift in the first quarter as did Cabela’s and Sportsman’s Warehouse. Strength in ammunition sales kicked in late in the first quarter, so Dick’s hunting business may actually have picked up in the second quarter versus the first, which can explain why the company does not expect improvement in the rate of decline for the hunting category in the second quarter compared with the first quarter.
In our estimation, comp growth at Cabela’s and Sportsman’s Warehouse will improve sequentially throughout 2014, and we highlight the easing NICS background check comparisons as an important point of reference. See exhibits 1 and 2.
Investors should also recognize that a high-teens comp decline for Dick’s hunting business does not include stronger performance in other product categories. For example, Dick’s commented that outdoor categories such as paddle sports and hunting and fishing apparel are tracking up double digits. We note that these categories are a larger part of the sales mix in the second quarter, whereas hunting is a seasonally smaller business this time of year.
From a short-term standpoint, we recognize that investor concerns about firearms and ammunition may linger, and our 2014 EPS estimates are below consensus for both companies. In our judgment, though, the second derivative, or change in the rate of growth, should work in investors’ favor as sales trends improve progressively through the year, and we maintain our Outperform ratings on both stocks.
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