thinking about retail: Dicks Sporting Goods (DKS)

DKS reported disappointing earnings Monday night.  Its stock dropped by 23% in Tuesday trading.  So far this year it has lost 49% of its value, in a market that’s up by 10%.  …this in spite of the bankruptcies of rivals Sports Authority and Gander Mountain, which should arguably have cleared the way for better results.

The obvious culprit here is Amazon (AMZN).

I’m sure that AMZN is a factor.  On the other hand, although AMZN is growing at 4x the +5% rate of annual expansion of sporting goods sales in the US, the online giant represents only about 4% of the total sporting goods market.  DKS alone is 50% bigger–and its bricks-and-mortar competition has shrunk considerably.  So online can’t be the whole story.

I think two other general factors are involved:

–Millennials vs. Boomers, with DKS, to my mind, clearly oriented toward Baby Boomers’ tastes.  This issue here is that although Boomers have more money than Millennials, their star is waning as Millennials’ is rising.

–a “normal” business cycle.  During most time periods and in most parts of the world, in my experience, consumers are constrained in their buying by the limits of their income.  As new households form and families rent/buy a residence, rent/mortgage and, sooner or later, things like furniture become significant purchase categories.  This means less money for other purchases–like new golf clubs.

From the late 1990s through 2007, however, that wasn’t the case. Universal availability of home equity loans enabled consumers to avoid budgeting and prioritizing purchases.  So the typical pattern of contraction in some retail categories while housing-related, expands was absent for an extended period.

Now it’s back.  My sense is Wall Street has yet to catch on.

As an investor, I’m not particularly interested in the sporting goods category.  But I think the pattern I see here isn’t an isolated phenomenon.  If I’m correct, we should be doubly careful of any traditional retailer.



more on demographics: Millennials vs. Boomers

Market intelligence company NPD recently published a paper titled “Winning Millennials, Gen X and Boomers with the Five Ws.”  It analyzes shopping habits of Americans in different age categories based on item-by-item data from individual consumers collected by the NPD Checkout Tracking service.

Its conclusions:

brick and mortar shopping

–as one might guess, the younger the consumer, the greater the preference for online.  The older the consumer, the greater the preference for bricks and mortar.

Baby Boomers are now seniors, meaning they are adjusting down their spending in line with reduced pension–as opposed to salary–income.  Boomers want stability, stores they’re accustomed to, availability of necessities, value for money and one-stop shopping. …in other words, warehouse clubs, where they spend on all sorts of items.  Pretty boring.

Boomers do frequent convenience stores, but mostly for gasoline.  Food accounts for less than a fifth of what they spend there.

–Millennials like convenience stores.  They spend more than other age groups on gift cards there (why, I don’t know).  But they, and Gen X also buy a lot of food in C-stores.

Millennials and Gen Xers ( go to warehouse clubs, but strictly for groceries.


Amazon is the king of online for all generations, making up 20% – 25% of individuals’ total online spending.

Millennials spend the largest part of their budgets online, Boomers the least.

Millennials use mobile apps of all sorts–like Uber, Seamless, GrubHub, Airbnb,and Etsy.   (Interestingly, NPD also mentions Target among Millennial favorites.)  Boomers, in contrast, stick with department store websites, QVC and travel services.

The younger the consumer, the more likely the purchase will be something that’s available primarily online or easiest to get online–meaning books, music, software or tickets.

my thoughts

Data from Washington show that Millennials are the largest segment of the US population.  They also show that Millennials’ income is at present about half the size of Boomers–but that Millennials pay is rising as they gain more work experience, while Boomers’ income is being more or less cut in half as they retire.  To my mind, this secular trend argues for investing where Millennials shop.

I hadn’t known how important convenience stores are to Millennials.

I’m more surprised, though, by the characterization of Boomers as a group already deep into a low-income retired lifestyle.  I’d have guessed that was still years off.  More reason to look for where Millennials shop.



Millennials and job-hopping

Knowing my interest in the behavior of Millennials, my friend (and regular reader of PSI) Bob sent me a link to a 538 Economics article on Millennials and job-hopping.  The post is short and worth reading, as is most everything on 538.

538 says that if we follow press accounts, Millennials are inveterate job-changers.  We can see this, the argument goes, if we compare how long they hold down a given position vs. the behavior of the cohort a decade or so older than them.  The numbers are clear.  Millennials change jobs more frequently than their older brothers and sisters.

So far, so bad.  This is the wrong comparison.  The real question should be, 538 says, how the behavior of Gen Xers compares with that of Millennials when Xers were the same age as Millennials are now.  Government data show that when they were 20-somethings, Gen Xers were more rapid job-changers than Millennials are now.

As 538 puts it, “The myth of the job-hopping millennial is just that — a myth.”

Why is this interesting, other than the gotcha moment for the press?

The virtue of the “bad Millennial” story is that it’s attention-grabbing, initially plausible, doesn’t require much thinking and is easy to write.  The not so good part is that it’s wrong.

We can probably figure this out, especially if we have friends like Bob.  I wonder how the newsfeed reading and parsing computers run by algorithmic traders deal with stuff like this.  Not well, I would think.

I think this kind of situation should present continuing opportunities to take a contrary position.  As always, one trick will be to try to figure out when momentum has shifted far enough in the wrong direction to make this profitable.  Another, harder one, will be to figure out when the pendulum has gone far enough and will soon begin to reverse itself.




assessing the holiday sales season

The commentators and analysts I read all seemed to argue that this holiday selling season would be sub-par.  They all trotted out the familiar stories of general economic malaise, lack of wage growth, the shrinking of the middle class, globalization, China, warm weather…

We’re now entering the home stretch of the holiday sales race as post-Christmas bargain hunting comes into full swing.  What I find striking is that the results so far have been much better than the consensus had expected.

What catches my eye is the jump in online (and especially online mobile) spending, and the strength of Millennial categories like furniture.

The mismatch between projection and reality seems to me to suggest that the consensus is trend following, and because of that tracking the spending of Baby Boomers–who have dominated the retail scene over the past few decades.  At the same time, it’s failing to capture the emergence of Millennials as an economic force.

The change may be as simple as that Baby Boomers no longer have gigantic home equity to tap to fund current spending.  Or it may be more powerful than a subtraction of the Boomer excesses of the past twenty years.  In either case, the overall economy is likely in better shape than the consensus believes.  And Millennials may be emerging as economic drivers faster than most have thought possible.



US retail inventories

Going into the end of year holiday shopping season, inventories of US merchants–especially of apparel–seem to be unusually (i.e., too) high.  I don;t think this is the case across the board.  It appears to be especially true of department stores, however.

I think this oversupply is partly caused by a reaction to last year’s troubles at the West Coast ports, meaning that merchants made their buying decisions early, to avoid running out of stock if labor problems resurfaced.

But I also think a couple of mindset issues are at work, as well.

–the recent strategic shift Wal-Mart announced to emphasize the internet suggests to me that throughout established retail, high level, long time executives who made their careers controlling the logistics of servicing physical stores have been in denial about online.

–in a housing upswing, the typical pattern around the world is that people who are establishing new households, either by renting or by buying, find the money to pay the rent/mortgage, paint, decorate, furnish…by shifting spending away from other, less immediately pressing, items.  Like apparel, for example.

The only time I can recall this reallocation not occurring is in the US, during the period from the mid-1990s to the crash in 2008.  That’s when homeowners were financing consumption by borrowing against the equity in their houses.

That’s no longer the case.  We’re back in a more normal environment, where a dollar spent on furniture or hoe improvements means a dollar less to be spent on clothes or toys (except for Star Wars, of course).

My thoughts:

It’s easier to adjust from having made the second mindset mistake than the first.  Revenues may not show who has made either; profits (or a lack of them) will.

The idea that as investors in retail we have to play the housing cycle as a key determinant of profit growth is another aspect of the Millennials vs. Boomers phenomenon in the economy.