The outlook for sporting goods tenants
Lockdowns benched a number of retailers but have had the reverse effect on sporting goods stores. A surge in demand for athletic equipment and apparel has boosted sales across the spectrum of sporting goods retailers, ranging from big-box stores to boutique bike shops. “It is a very strong category that has gotten stronger because of the pandemic,” said Brandon Famous, executive managing director of the CBRE Retail Advisory & Transaction Services Occupier practice.
Sporting goods retailers are benefitting from shifts in consumer behavior due to COVID-19 and related lockdowns. That includes a focus on health and fitness and activities that people can do at home and outdoors. Gyms and fitness centers have been closed for an extended period, and those that have reopened are operating at reduced capacity to aid social distancing. “What people have done to compensate for that is that they buy their own equipment,” said Famous. That is boosting demand not only for hard goods like fitness equipment, bikes and golf clubs but also for soft goods like sneakers and apparel.
In the second quarter, Dick’s Sporting Goods, a leader in the category with more than 730 stores across the U.S., reported its highest ever sales and earnings, including a 20.1 percent year-over-year increase in net sales, reaching $2.7 billion. Consolidated same-store sales increased 20.7 percent year over year, even with 15 percent of the company's stores closed during the quarter. “After the worst of the shutdowns in the spring from the virus, there was a lot of pent-up demand, and a lot of that went into athletic apparel and footwear, which greatly boosted Dick’s and others like Foot Locker,” said David Swartz, an equity analyst in the consumer sector research group at Morningstar.
Strong sales could continue into 2021 until a vaccine is widely available. However, analysts are skeptical that those levels will be sustainable. “There is perhaps some permanent benefit that could outlast the virus,” he said. “However, there also was a boost in spending from the stimulus and unemployment checks, which is likely one time in nature.”
Oppenheimer managing director Brian Nagel said: “We just don’t know at this point. Although some of this shift may prove to be permanent, in my view, spending is likely to normalize once the COVID crisis passes.” Some of the outsize spending flowing to sporting goods will even out and flow back to entertainment, dining out and other categories, he says.
“Normalized” sales suggests lower but still positive growth. In the U.S., sporting goods retailers generate an estimated $44.5 billion in annual revenue, according to an IBISWorld report on the sector. The research firm forecasts annual revenue growth for the category at 1.2 percent for 2020 through 2025, due in part to a greater focus on health and fitness. That is a notable shift after five years averaging negative 2.6 percent growth per year.
Despite an avid sports culture in the U.S., sporting goods retailers face some big challenges, and high-profile bankruptcies have occurred in recent years. Sports Authority — one of the biggest national chains, next to Dick’s — went out of business in 2016 and closed roughly 460 stores. Vestis Retail Group — the operator of Eastern Mountain Sports, Sport Chalet and Bob’s Stores — also filed for bankruptcy in 2016 and shuttered 56 stores. And Modell’s Sporting Goods filed for bankruptcy in March, which impacted its 153 stores in the Northeast.
The shakeout does allow those left standing to grab more market share. The issue that remains is that those pre-COVID-19 challenges haven’t disappeared.
“Generally, sporting goods retailers have been struggling for years” thanks to competition from online and brick-and-mortar stores, said Swartz. Apparel brands like Nike and Adidas increasingly are going direct to consumers with their own online sales. Retailers also face competition from Amazon, as well as general merchandise retailers like Target, Walmart and Kohl’s. In addition, the pandemic is putting pressure on college budgets, and some have cut programs like men’s gymnastics, tennis and track and field. “So there are some trends that may not be so favorable to sporting goods,” said Swartz.
Dick’s and Bass Pro Shops are the main players in what remains a highly fragmented market of local and regional sporting goods and specialty stores. Combined, the two generate nearly one-third of the revenue in the sector, according to IBISWorld. Dick’s Sporting Goods also operates 126 Golf Galaxy, Field & Stream and True Runner stores. Bass also has a sizable footprint. In 2017, the company completed a roughly $4 billion acquisition of rival outdoor retailer Cabela's and now operates 169 stores in the U.S. and Canada. Academy Sports + Outdoors is a distant third, pulling in 8.4 percent of the sector’s revenue, according to IBISWorld. The company operates more than 250 Academy Sports stores across 16 Southeast states. Other regional players include REI, Big 5 Sporting Goods, Scheels and Hibbett.
The large-format stores have been doubling down on in-store experiences ranging from indoor golf ranges and shooting galleries to, in the case of Scheels, even in-store Ferris wheels. However, leasing activity prior to the pandemic primarily owed to expansion of smaller, specialized stores, and that likely will continue post-COVID. Examples include Peloton showrooms that allow people to test the high-end stationary bikes and treadmills and Rapha’s “Clubhouses” for cycling enthusiasts. “I don’t think that we will see the amount of big-box sporting goods that we have seen in the past,” Famous said. “We will see smaller stores with specialty lines.”
Will sporting goods retailers seek more and better space?
Strong performance in a tenant sector bodes well for shopping center owners looking to hold on to existing tenants. However, the jury is still out on whether sporting goods retailers will pursue better real estate locations. “Some retailers will take advantage of what the pandemic has caused, which is more space that is available and rent compression,” said Famous. “They also may increase expansion programs to take advantage of market conditions.”
Additional expansion may be tough for Dick’s. Though the firm has a solid balance sheet, it already has a sizable store footprint, and its new-store openings have been slowing in recent years. In 2019, the company opened eight Dick’s Sporting Goods stores and closed 11. In 2020, it will have opened six of that brand and closed one to end the year at 731 total Dick’s Sporting Goods stores. On a positive note, the company has been testing outlet and clearance concept stores with Overtime by Dick’s Sporting Goods and Dick’s Sporting Goods Warehouse Sale. In June, the company opened three Overtime stores and five Warehouse locations, bringing its total outlet and clearance stores to 11 in nine states.
“Some retailers will be aggressive, but that involves more than just brick-and-mortar,” Famous said. “It is understanding and trying to perfect their e-commerce business. Online sales have gone through the roof during the pandemic, and for many retailers, that was eye-opening. What they have learned is that they have got to improve their e-commerce business, whether that is their supply chain, websites, fulfillment, etc. Ultimately, that complements the brick-and-mortar stores.”