A miserable week for sporting goods retailers was capped off on Friday as Foot Locker Inc. (FL) badly disappointed investors with its second-quarter earnings release. (Jim Cramer shares his own thoughts on Foot Locker today in this piece.) With revenue of $1.7 billion, which was $100 million below consensus estimates, the company missed the earnings consensus of 90 cents a share by 28 cents. Shares fell 28% on the day and are down about 50% year to date. Same-store sales were down 6%, and company management is less than upbeat for the rest of 2017.
Foot Locker's dreadful day came on the heels of dreadful results by Dick's Sporting Goods Inc. (DKS) , Big 5 Sporting Goods Corp. (BGFV) , and Hibbett Sports Inc. (HIBB) , which along with FL were down an average of 21% last week alone. Year to date, the group is down an average of more than 55%, not so quietly suffering its own 2008/2009-like market meltdown.
Online shopping is no doubt one of the main culprits in the demise of these names and other retailers, too. The questions now are whether there's life left in any of these companies, whether there's a place for brick and mortar, and whether they'll be able to adapt to this new world. Last week's reaction suggests that the market believes the game is over for the sporting goods sellers. There likely will be more casualties in the wake of the bankruptcies of Sports Authority and others, but the question before us is whether there's any money to be made in the near and intermediate term.
In their inefficiency, markets can overreact to news, both positive and negative. As bad as FL's quarter was, it ended the period with $1.043 billion, or about $8 per share, in cash and just $126 million in debt. While trends are not looking great right now, that cash stash gives FL a fairly long runway to figure things out and find its place in modern-day retail, if indeed there is one.
However, I've gone a slightly different route to play what I believe to be a near-term overreaction by going smaller in size, as I typically do, in the form of Hibbett Sports. I added to the position on Friday while shares were getting the stuffing knocked out of them as the market was digesting second-quarter results. Shares traded in a fairly wide range, bottoming at $9.43 and closing at $10.90 to end the day down 5%.
The company's earnings call was a bit more upbeat than I would have thought. While I take that with a grain of salt, I did hear what I wanted to -- that Hibbett intends to use some of its cash to buy back shares at these low prices. That's only relevant if management follows through, of course.
As a value investor, I sometimes will buy, right or wrong, what other investors shun, and that's the case here. However, I am under no illusion at the outset that this will be a long-term play. For now, it is taking advantage of what I believe to be a market overreaction. Buyer beware, though. This is fraught with risk, and I easily could end up being on the wrong side of the trade.
