Today is the one-year anniversary of last year's summer specialty retail Armageddon, which was especially brutal for sports retail. It was precipitated by Dick's Sporting Goods Inc.'s (DKS) second-quarter earnings miss and lowered guidance, and sent shockwaves across the sector.
Dick's punishment was a big 23% haircut. Three days later, Foot Locker Inc. (FL) took a 28% hit after badly missing third-quarter estimates, and fell another 8% the following day. Hibbett Sports Inc. (HIBB) , which received much of its punishment the previous month, falling 33% on July 24, gave back another 17% that same day. Even higher-quality names such as Nike Inc. (NKE) were affected, although much less than the others.
Elsewhere, the wheels had been coming off of small retail for quite some time on a name-by-name basis. Lowered guidance and the continued threats of Amazon.com Inc. (AMZN) had doomed many names in the market's eyes.
What an incredible opportunity all of that turned out to be. It is not that the Amazon threat was and is not real, but rather that markets overreacted, prematurely declaring the death of brick-and-mortar retail. Some companies, I believe, such as old-line mall anchor stores Sears Holdings Corp. (SHLD) and J.C. Penney Co. (JCP) , are dying slow deaths and will not recover. However, there are many that have some breath left in them.
Last year's situation created a lot of "50-cent dollars," which is nirvana for the deep-value investor. Companies with loads of cash (some of them, anyway) and little debt were on fire sale.
Fast forward and most of them have recovered. Dick's is up about 40% over the past year, while Foot Locker has risen 32%, and Nike is up 45%. The smaller names, those that suffered even more severe punishments than their larger cousins, have flourished. Hibbett has risen more than 120%.
Of the five small retailers I've had positions in over the past year -- Vera Bradley Inc. (VRA) , Cato Corp. (CATO) , Hibbett, Big 5 Sporting Goods Corp. (BGFV) and Fossil Group Inc. (FOSL) -- just Big 5 Sporting Goods has disappointed; while shares are up about 10% since I initiated a position in February, they've pulled back 57% since topping out at $9.40 in June. The company missed on second-quarter earnings last month, reporting a loss of one cent versus the expected 11-cent profit per share. Big 5 recently did declare its regular 15-cent quarterly dividend when it released earnings; it's now yielding 10.4%, although the market appears to be pricing the stock for a dividend cut.
Meanwhile, I continue to look for the next big market mispricing. It may be right before my eyes, although I've yet to identify it. It likely won't be as easy (in hindsight) this time around. Sometimes stocks only appear to be cheap, and trade that way for very good reasons.
