I can only come to one of two conclusions about the almost-heroic effort that sporting goods stocks have made this year: Either everyone in the country is now playing some sort of team sport, or everyone in the country is equipping themselves for the apocalypse.
Maybe it’s a little of both.
Yes, names like Hibbett Sports (NASDAQ:HIBB), Polaris Industries (NYSE:PII) and Cabelas (NYSE:CAB) are up a respective 20%, 47% and 80% year-to-date, and they’re not statistical outliers. The recreation industry’s equities have been red-hot in 2012, and perhaps more important, they’ve deserved every bit of the run-up.
The question is, of course, will these names be deserving of another run-up in 2013?
How well the sporting goods industry has done this year is quite remarkable when you stop to think about it.
Take Dick’s Sporting Goods (NYSE:DKS) as an example. Last quarter’s sales of $1.31 billion were 11% higher than the year-ago revenue of $1.18 billion. Per-share income of 40 cents not only topped estimates of 37 cents, it left the year-ago number of 32 cents in the dust, trumping it by 25% — and that has been the norm since 2009.
Cabelas is another name in the group that has been on fire. The company — which caters to hunters and fishermen rather than sports and fitness fans — cranked up its Q3 top line from $675 million a year ago to $738 million this year. Per-share profits improved from 50 cents to 60, and like Dick’s, that growth is simply par for the course since 2009.
The same can be said of Hibbett Sports, and there’s even a light at the end of the tunnel for Big 5 Sporting Goods (NASDAQ:BGFV), which put up some erratic earnings in 2011 and early this year.
Heck, the growth in spending on “fun” has even become measurable in the big-ticker arena of four-wheelers and RVs. Polaris, which makes ATVs and motorcycles, is on pace to earn a record $4.38 this year — more than twice what it earned in 2010. Meanwhile, Winnebago Industries (NYSE:WGO) pumped up its third-quarter top line from $130.5 million a year ago to $162.5 million this year, and is forecasting a per-share profit of 50 cents for 2013. That would be Winnebago’s best year since 2007, before economic Armageddon landed right in our laps.
That might be why WGO shares are up 77% year-to-date.
Surprised? Most investors are, given the gloom-and-doom headlines we’re seeing more often than not. Another recession is supposed to be around the corner. Earnings are supposed to be terrible. Consumer confidence is supposed to be weak. Yet, none of those assumptions are actually supporting by the numbers … at least not yet. The Conference Board’s October consumer confidence reading, for example, was the highest its been in five years.
That being said, there are a few small trends — though not one big trend — ultimately driving the big growth for the sporting goods and recreational sectors. Some of them will accelerate, some will fade, and some will whither away completely. But, investors need to understand all of them.
In no particular order …
- Recession fatigue: Though it’s the least obvious, it also might be the biggest factor in play here — consumers are fed up with not splurging on themselves a little. Given enough time (things have been “tight” for nearly everyone since 2008), people will find a way and the money to start spending on toys and playtime again.
- Health and fitness: Long overdue, Americans finally are getting more exercise. They need the right clothes to do it in.
- Survivalist buying: You might snicker or roll your eyes at them, but there are enough folks who think the end of the world as we know it is right around the corner. They’re building bunkers, buying freeze-dried food, and, of course, purchasing firearms.
- Firearms under attack: Though President Obama’s gun-control attitude has been exaggerated by the right, it’s no big secret that the President’s agenda could crimp ownership and purchase of firearms — and that fear has prompted a surge in gun sales. That has been good for Dick’s, and great for Cabelas. However, if his agenda is turned into law, it could pull the rug out from underneath the industry in a hurry.
- Things are better than we pretend they are: The rising consumer confidence says it all.
While some of those bullish undertows won’t last through the end of 2013 (i.e. the pressure on firearms, one way or another), most of them will keep growing, even if it moderates. Trends like better health and physical fitness should continue to accelerate, while the broad — even if slow — recovery in consumer spending lends a modest hand across the board.
While there might not be room for a repeat of 2012’s huge gains for these stocks next year, there’s still plenty of room to run.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.