Beware the retail sector, it’s going to fall
Today's Financial News - Posted November 19, 2009
Too many investors think the worst is already priced in. The figures from Dick’s Sporting Goods (NYSE:DKS) prove we are in for a wild ride.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): What’s the first thing you cut out when the economy gets rough? Generic answer: Anything you don’t need.
That is not good news for the nation’s sporting goods retailers. From outdoor superstores like Cabelas (NYSE:CAB) and Gander Mountain (NASDAQ:GMTN) to Dick’s Sporting Goods (NYSE:DKS), anybody that sells a product considered discretionary, sales growth is hard to find.
The news from Dick’s this morning proves the point.
Shares of the company are down by nearly 10% today after the company released its third-quarter financials. On a year-over-year basis, the figures look surprisingly good. But this time last year, the retailer took massive restructuring charges.
With a bottom line of just $6.2 million, any progress would create a large percentage gain. This year’s third quarter, in fact, produced bottom line growth of over 200%.
But just $18.9 million in quarterly profits is no path to success for a $2.5 billion firm like Dick’s.
Even worse, the company told analysts to ratchet down their Q4 expectations. Dick’s tells us to expect earnings per share in the range of $0.41 to $0.46. Until this morning, the Street was expecting a figure of $0.57 per share.
Just the beginning
Expect lots of similar news reports out of the retail industry over the next two months.
With Black Friday just a week away, we are into the critical sales period for the year. Even a tiny downturn in consumer sentiment over the next couple of weeks could equate to massive disappointments come the end of the year.
If you are one of our many TFN Strategic Trader members, you know I warned of this situation back in August.
On the 15th of that month, here’s what I said about Cabelas:
Just like so many homebuilders errantly believed their business would begin to build last spring, Cabela’s investors are expecting a strong end-of-the-year charge from their company.
It is not going to happen. The industry is fundamentally weaker now than it was six months ago.
Cabela’s target demographic was one of the hardest hit during the economic downturn. With a slow summer in the history books, unemployment checks are starting to run out and many Americans are bracing for a lean winter ahead.
Fewer folks can justify shelling out a few hundred bucks for the latest camo pattern when last year’s will work just fine (especially if all they are hiding from is the repo man).
Over the next few months, Cabela’s investors will sober up, shares will drop and the folks on the short end of the trade will prosper.
I then instructed investors to buy the company’s December 15 puts.
Nailed it! Just one month later, we sold them for gains of 80%. Over the last three months, shares of Cabela’s have fallen from over $16 to just $12.75 today.
I am confident Cabela’s is nearly done its plunge, company’s like Dicks and Gander Mountain are in for rough seas.
Fortunately Gander Mountain is going private, so investors won’t feel the pinch. But it’s too late for Dick’s investors. They are already feeling the pain.
As Christmas approaches, beware the retail sector.
Next Article: Where would you rather have your money?
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