Leisure Equipment, Products, & Facilities
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DKS $112
22 Aug 2023 |
Dick’s Sporting Goods plunges by nearly 25%; it still doesn’t look cheap
It’s called “shrink,” but that’s just a politically correct way of saying theft. The condition was one of several reasons Dick’s Sporting Goods (DKS $112) gave for a disappointing earnings report; a report which caused shares to sink by nearly one-fourth in a matter of minutes. On sales of $3.22 billion (analysts had been predicting $3.24B), the company earned $2.82 per share in the second quarter of the year. That is about 35% lighter than the Street expected. Management also reduced its full-year outlook, citing the resumption of student loan payments, a choppy economic environment, and the theft issue. Not showing up in this quarter’s results, the company will also have to shell out around $20 million in severance packets to recently laid off employees. From our perspective, the biggest issues facing the retailer are increased competition in the space, a poor management team, discretionary cutbacks by consumers, and the lingering theft issue which few retailers have the courage to take on. And none of those issues are going to dissipate soon. Consider the firm’s operating margin—the proportion of revenue left over after paying the variable costs of production. That measure of efficiency went from 16.5% in 2021 to 11.8% in 2022, and we expect the number to continue dropping as pricing power further erodes. Key vendors like Adidas and Nike have been strongly developing their own direct-to-consumer channels, reducing their dependence on third-party retailers such as Dick’s. Additionally, we see inflation continuing to constrict margins, as it is becoming more difficult to pass along higher prices on the type of elastic goods sold at the retailer. It may seem as though investors overreacted to this latest earnings report; considering the challenges ahead, however, we don’t think so. With well-run competitors like Scheels (privately held) and Academy Sports and Outdoors (ASO $53) increasing market share, we see no reason to buy DKS on this hefty pullback; nor do we see any unique value proposition being presented by management. |
PTON $20
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Floundering Peloton has one viable option remaining: get acquired and let the new owner broom the C-suite
(22 Apr 2022) We were early investors in Peloton (PTON $20), a company which brought a little life back into the languid fitness products market. We stood by the company when they were being attacked by thin-skinned viewers over a Christmas ad which we found to be highly effective—and not at all offensive. Even with the steep price for its products (the Tread+ was selling for around $5k with warranty), we liked the company's business model. Then, following a tragic accident involving a child as well as scores of other incidents, cracks began to appear in the management team's facade. After briefly trying to go on offense against the feds, Co-Founder and then-CEO John Foley was forced to strike a deal with the Consumer Product Safety Commission (CPSC), agreeing to offer a full refund for the 125,000 or so customers who purchased the pricey tread. Furthermore, the machine could be returned for a full refund at any point in time up until 06 November, 2022. Since then (the agreement was announced last May), John Foley has stepped down as CEO, but the management missteps continue. As if a $39 monthly fee for the Peloton membership was not enough, the company announced it would be raising prices to $44 this June. Here's the insult to injury part (truly, no pun intended): The company's safety "fix," which was also part of the CPSC agreement, made it virtually impossible to use the tread without a membership! What a stupid move, considering the fact that users now have a full six months to think about that slap-in-the-face before deciding whether or not to get their full refund. Membership prices should have been reduced to $30 per month, and customers who willingly paid out a whopping amount of money should retain the ability to run on their tread without a monthly membership fee. That would have been an easy software fix, but that ship has now sailed. The only remaining viable option for the company is to court suitors, such as Apple (it would be a great fit), and agree to be acquired. With a market cap of under $7 billion (it was a $50 billion company in January of 2021), that would be a win-win outcome. With an obtuse management team, however, that crystal clear option is probably not even being considered. When PTON shares fell to $50, we said they may be worth a look—though we did not own them at the time. We obviously underestimated the management team's ability to make dumb decisions. Ultimately, we imagine the company will be backed into a corner and have no choice but to sell—or liquidate. As for us, we will continue paying the confiscatory monthly fees through the summer, then turn that fancy puppy in for a full refund and buy another company's tread. With the leftover dough, maybe we will buy a nice television to hang in front of the device; one that offers more than a single, captive, expensive channel. (For Peloton owners, go here for the CPSC recall info, plus the company's contact info; deadline for full refund is 06 Nov 2022.) |
PTON $50
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If you were upset that you missed Peloton's massive share price run-up, you have been given a second chance
(08 Nov 2021) We added exercise equipment company Peloton (PTON $50) to the Intrepid Trading Platform way back in February of 2020 (which seems like a lifetime ago) at $29.11 per share. While we had a nice gain in the position, we certainly missed the majority of the run-up as it rocketed all the way to $167.42 in the early days of the pandemic. The company makes the best-selling treads and stationary bikes on the market, but we have had misgivings about its rather mandatory subscription service—it costs $39 per month and the hardware/software interface makes it difficult to do without. As could be expected, the return to some semblance of normalcy has led to a resurgence in gym memberships and a slew of lowered price targets for this "stay-at-home" play. The company has also dealt with recalls following the well-publicized safety issues of its pricey Tread+ and an ongoing battle with the Consumer Product Safety Commission. The company's problems hit a crescendo last week when Peloton's management team lowered full-year guidance and reported a net loss of $376 million for the latest quarter. With most analysts slashing their price targets nearly in half, and the shares falling 69% from their intraday highs of 14 Jan 2021, is the damage done or does this portend more pain ahead? That will depend on how management responds to its three imminent threats: increased competition in the space, safety issues, and a consumer base ready to get back out into the world. As we write this, PTON shares have fallen to the $50 range. The company, for all of its challenges, is not going anywhere, and we believe it will effectively deal with its issues. It should be noted that the company sells a large percentage of its equipment to health clubs, universities, and hotels—though it doesn't give investors a breakout of its commercial sales. Additionally, Peloton just completed its $420 million acquisition of Precor, an exercise equipment manufacturer which primarily sells to commercial entities such as hotel chains, picking up 625,000 square feet of manufacturing space in the process. While we don't currently own PTON in any Penn strategy, $50 seems like a tempting buy point. |
LULU
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Lululemon will buy at-home fitness company Mirror for $500M
(30 Jun 2020) It seems like a better fit for a company such as Peloton (PTON), but athleisure firm Lululemon (LULU $129-$294-$325) has announced that it will make its first-ever acquisition: it will buy home-fitness startup Mirror for $500 million. By now, most have probably seen ads for the firm's product and services—the ultra-cool, futuristic-looking stand up "mirror" ($1,495), and the embedded workouts which require a monthly subscription fee ($39) to stream to the device. The deal makes more sense when we consider that LULU was one of the first to provide seed money to the company, investing $1 million when the private firm was less than one year old. Additionally, for a company whose sole source of revenue is derived from its retail clothing business and selling ancillary workout equipment such as yoga mats, the acquisition could provide a real boost to future growth. Following the deal, Mirror will operate as a standalone company within the $38 billion parent firm. Sitting just shy of $300, we believe shares of LULU are fully valued. |
SIX
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Six Flags Entertainment: the ultimate contrarian play?
(25 Jun 2020) Six Flags Entertainment Corp (SIX $9-$19-$60) is a $1.6 billion small-cap theme park operator with 25 locations in North America and Mexico. With annual attendance of nearly 50 million visitors, the company generates roughly $1.5 billion in sales annually. The Texas-based firm made news this week when it hired the highly-qualified former Guess CFO, Sandeep Reddy, to fill the top finance role. Shares of SIX topped out near $60 last August, but are currently 67% off that high. Based on the company's financials, the current price seems to bake in zero growth going forward, an assumption we don't buy into. |
PTON
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It takes a warped, angry mind—or an industry enemy—to feign outrage over the new Peloton ad. (03 Dec 2019) It is one of my favorite commercials this holiday season. A television ad for Peloton (PTON $20-$34-$37) depicts a nice-looking young couple and the Peloton workout bike the man gave the woman as a Christmas gift one year earlier. In thirty seconds, the spot travels along on the woman's one year physical fitness journey, showing how the bike has enhanced her overall well being. With all of the truly infantile ads out there, we found this one refreshing. Not so fast. Social media is abuzz with outrage (nothing new there) and feigned insult over the ad. Some call it sexist (the guy trying to get the woman in shape), while others are just mean-spirited ("wow, she went from 116 to 112 in a year"), while still others simply parody the spot. Our first thought was that one of the old-guard stationary bike companies frothed up this brouhaha because they are being soundly thumped by this dynamic upstart. That may be the case, but it still takes a lot of true boneheads to elevate the anger to viral status. Hopefully, Peloton will continue to run the spot and ignore the haters. We first read about this so-called backlash from an email issued by Ad Age, a slanted marketing and media "publication" that markets itself as being "Important to Important People." Um, OK.
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HAS
MAT JAKK |
After falling over 25% in a month, is it time to pick up toymaker Hasbro? (20 Nov 2019) Ever since Mattel (MAT $9-$12-$17) lost its sixty-year lock on Disney (DIS) products to rival toymaker Hasbro (HAS $77-$95-$127), we have been arguing that an investment in the latter made a lot more sense. In addition to fumbling away this critically-important relationship, Mattel has also gone through something like three CEOs in as many years. Not a situation that portends good things to come. That being said, Hasbro took a 25% dive in October after Q3 failed to deliver. So, heading into its sweet spot of the year, is it time to pick up some shares? We don't think so. Somewhere around 70% of Hasbro's toys emanate from China, and those are the precise products due to get pounded by the planned December wave of tariffs. We also don't like the high multiple (46 P/E) on the shares, and are having a hard time figuring out how that could be justified. This isn't exactly a high-growth industry, after all. An investor could pick up some shares of Mattel, maker of Barbie, Hot Wheels, and Fisher-Price, and pray for a buyout offer from Hasbro (three times its size), but that seems like a risky prospect. In short, it is best to steer clear of this industry until one of the players figures out how to dominate in an era of high-tech video games. If investors really want to gamble in this space, we offer up Jakks Pacific (JAKK), the $30 million toymaker selling for $0.85 per share (down from $20 in 2011).
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HAS
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Hasbro shrugs off Toys R Us bankruptcy, jumps double digits. (23 Jul 2018) Toymakers Hasbro (HAS $79-$106-$112) and Mattel (MAT $12-$17-$21) continue to travel down divergent paths, and the former is the one to follow. After taking a hit on the Toys R Us bankruptcy news, the company's shares clawed—and then spiked—their way back to their February highs. Monday's 13% gain for Hasbro came on the heels of a very strong second quarter. The company brought in $904 million in revenue for the quarter, and earned $0.48 per share versus expectations for $0.33 per share. Of interest, the company said it continues to work to yank more of its production out of China and to other areas of the world. Right now, 70% of Hasbro's products are made in China. From a financial standpoint, management said it believes it can increase the company's gross profit margin from its current 54% back up to above 60%. That would be quite a feat, as it hasn't achieved that level in over a decade. For comparison, Mattel's gross profit margin is sitting at 31%. (Gross profit margin, or simply gross margin, is figured by subtracting a company's costs from its overall revenues, then dividing that number by revenues.)
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MAT
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Beaten and bloodied Mattel will get a new CEO (again)
(19 Apr 2018) In January of 2015, we told readers that Mattel's (MAT $13-$13-$26) CEO was resigning after a 60% drop in fourth-quarter (2014) earnings. At the time, shares were sitting down around $30 per share, but we weren't biting. In January of 2017, we reported that Mattel saw their global sales fall by 8% in the fourth quarter (2016), forcing out the new CEO. Now, in April of 2018, we can report that new CEO Margo Georgiadis is leaving the firm after a bad—you guessed it—fourth quarter. Mattel stole Georgiadis, who will become the new CEO of Ancestry.com, away from Silicon Valley in hopes that she could bring the toymaker into the digital age. She couldn't. Now, with their fourth CEO in as many years, the company sits at $13 per share, a shell of its former self. The loss of the famed Disney line (Mattel was an original sponsor of The Mickey Mouse Club back in 1955) to Hasbro in 2016 certainly hastened the company's demise, but it has been a rudderless ship for a number of years. Perhaps 53-year-old Ynon Kreiz, who was selected this week to be the new chief executive, can provide the leadership needed to navigate Mattel to safer waters. Or perhaps rival Hasbro (HAS) is willing to make a new offer for its old rival. |
Toys R Us
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It doesn't look like Toys "R" Us is coming back this time around
(09 Mar 2018) The plan was to declare bankruptcy and then come back after shedding some debt, as so many firms have done in the past. The plan went awry, however, and this looks to be the end of the line for iconic toy retailer Toys "R" Us. Last year, in the Penn Wealth Report, we wrote a short but scathing piece about the bumbling management at Toys "R" Us, reminiscent of Radio Shack's team just before that company went out of business. It appears that any potential private equity suitors felt the same way, as the company was simply unable to find a buyer or restructure its debt with lenders. So, another big brick-and-mortar store bites the dust. But don't let them tell you it was due to online retail competition; this had everything to do with the people in the C-suite. |
HAS
MAT |
Hasbro may be getting ready to make an offer for Mattel
(14 Nov 2017) Toymaker Mattel (MAT $13-$18-$32) spiked over 20% on Monday following reports that Hasbro ($77-$97-$116) was interested in taking over the floundering company. Recall that Hasbro took the lucrative Disney line away from Mattel last year, and the companies have been going in different directions—earnings-wise—ever since. In the digital world in which we live, the deal makes a lot of sense. To be sure, $6 billion Mattel is at greater risk than Hasbro right now, but both companies probably need each other to remain viable entities. Hasbro, which has a market cap of $12 billion, jumped about 5% on the takeover rumors. |
VSTO
AOBC RGR |
Gun producers continue their dive that began after 2016 election
(09 Nov 2017) Unwittingly, Barack Obama was the best thing to come along for gun manufacturers since the self-contained cartridge. And let there be no doubt, all handgun sales would have been banned if the former president had his way. Now that a pro-Second Amendment president is in the White House, however, investors are fearful that the gun-buying spree has come to an end. Gun-maker Vista Outdoor (VSTO $12-$13-$18) plummeted an incredible 29% on Thursday after missing expectations and issuing a dour forecast. Smith & Wesson parent American Outdoor Brands Corp. (AOBC $13-$13-$25) has fallen 53% since the election, and Sturm Ruger & Co. (RGR $45-$49-$69) isn't far behind. So, are these deep value plays worth looking at? You bet. Our favorite of the big three? We would go with Smith & Wesson maker American Outdoor Brands Corp., with their steady increase in annual operating revenue and their ultra-low 8 p/e. Did we take any action? Penn members/clients can see the Trading Desk. |
HAS
MAT |
Hasbro gets pounded thanks to Toys-R-Us declaring bankruptcy
(24 Oct 2017) The numbers looked fine: toymaker Hasbro (HAS $77-$90-$116) saw its third-quarter revenue grow by 6.5% over the same period last year, and adjusted earnings-per-share grew by 1%. The problem came in the guidance. While the street is looking for an 11.5% revenue spike from Hasbro over the coming holiday season, the company is projecting a 4% to 7% increase, due in large part to the Toys-R-Us bankruptcy filing. That guidance sent the stock tumbling nearly double-digits yesterday, closing at $89.75 per share. It could be worse: rival Mattel's (MAT $14-$15-$33) shares have fallen 44% since the first trading day of the year. |
Toys R Us
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Toys R Us heading for inevitable bankruptcy thanks to mismanagement
It is so easy to write off the bankruptcy of a company like Toys R Us (which is probably coming in the next few weeks), or Radio Shack, or Borders, or so many others simply because of the industry they operate within. After all, critics would argue, there was once a thriving buggy whip business until technology made it obsolete. In the case of Toys R Us, however, that is a lazy and insincere answer...read the rest of the story in the Penn Wealth Report, Vol. 5 Issue 02 |
HAS
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(24 Jul 2017) Hasbro down despite handily beating earnings expectations.
It would have been hard to imagine an earnings beat that would have justified Hasbro's (HAS $76-$110-$116) meteoric (45%) jump in its share price year-to-date. Perhaps that is why the company dropped around 5% at Monday's open despite sales of $973 million for the quarter—an 11% increase from Q3 of 2016. The big bright spot in the numbers? Hasbro's franchise lines (Disney, Transformers, Spiderman, etc.) saw a 21% increase in sales. |
HOG
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(18 Jul 2017) Stock of the Day: Harley-Davidson
We figured that, following the company's Q2 earnings report, Harley-Davidson (HOG) would make a big price move; we just weren't sure in which direction. Well, we got our answer. The iconic American cycle maker has been getting beaten up ever since its Q1 earnings report, falling about 17% since April. At Tuesday's open the company's shares fell another 11% after just missing revenue expectations. Revenues fell from $1.67 billion in Q2 of last year to $1.58 billion this past quarter. More concerning, motorcycle shipments are expected to fall between 6% and 8% in 2017. Shares are circling around new 52-week lows today. For an adventurous investor, HOG sitting in the mid-40's range with a P/E of 14 may be worth the risk. We are holding off, as we can't (yet) see the catalyst for a big uptick in price. |
PII
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(21 Mar 2017) Polaris to recall 19,000 ATVs. Mid-cap recreational vehicle maker Polaris Industries (PII $70-$88-$104) has announced the recall of 19,200 all-terrain vehicles due to fire hazard and risk of injury, according to the US CPSC (Consumer Product Safety Commission). According to the recall notice, the right side panel heat shield located on models 2015/2016 Sportsman 850 and 1000 ATVs can melt, posing a fire hazard or burn hazard to riders. Polaris has received around 800 reports of incidents surrounding the metal component. PII is a $5.5 billion company with a p/e of 26 (about right for the industry) and a dividend yield of 2.6%.
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HAS
MAT |
(06 Feb 17) Moving in opposite direction of Mattel, Hasbro blows out quarter. Toymaker Hasbro (HAS $69-$95-$89) blew past its 52-week high of $89 per share after reporting an 11% increase in Q4 revenues thanks to, in good measure, its Disney line of dolls. This is in stark contrast to our report of two weeks ago highlighting Mattel's (MAT $25-$26-$35) weak holiday season. In quite the coup, Hasbro took the Disney line away from Mattel last year, ending a relationship dating back to 1955. Considering the fact that sales in Hasbro's girls' business surged 52% for the quarter, the impact of that coup is huge.
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MAT
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(25 Jan 17) Barbie-maker Mattel tumbles after close, to replace CEO. Barbie had a really ragged holiday season, along with virtually every other toy line its parent company Mattel (MAT $26-$31-$35) churns out (like Fisher-Price). Global sales fell 8% in Q4, to $1.83 billion, and profit figures were even more dire: $174 million, or a 19% drop. Another reason for the pounding? Mattel lost its Disney line to rival Hasbro (HAS $69-$85-$89) last year. Following the results, the company said it would replace its CEO with former Google executive Margaret Georgiadis. While MAT will open at or near a one-year low on Thursday, we don't find it attractive, even for the short-term Intrepid Trading Platform.
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MAT
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Mattel CEO's Resignation a Sign of Changing Toy and Game Trends (26 Jan 15) Shares of Mattel (MAT) fell sharply Monday after the company reported a nearly 60% drop in Q4 earnings, causing the CEO to resign. Bryan Stockton was brought in three years ago to resuscitate the largest US toy maker, which makes such iconic brands as Barbie and Hot Wheels, but bleak holiday sales did him in. Income in the fourth quarter tumbled as much as earnings, falling 59% to $150 million down from $370 million. One big challenge was the success of Disney’s (DIS) Frozen franchise, which had stronger sales in the toy stores than the Barbie chain this past Christmas season. The company is not down for the count, and lines such as Monster High and Fisher-Price still rule their respective categories. However, these categories are losing ground to the higher-tech segment of the game and toy market. Shares are down near 1-year lows, but we aren’t biting. (Reprinted from the Journal of Wealth & Success, Vol 3 Issue 5. Not a member? Click Here.) |