On Tuesday at Goldman Sachs’ 24th Annual Global Retailing conference in New York City, Ed Stack, chairman and CEO of Dick’s Sporting Goods, likened the potential recovery in the athletic space to the recent bounce back in the golf category as well as the surprise turnaround by Best Buy.
Stack noted that about three or four years ago, investors were expressing strong concerns about a golf category that was seeing margin compression amid promotions amid high inventories. Now, the golf business is “very good” as inventories right-sized and some innovation arriving.
Stack added, “There’s pricing stability, the margins are up and I suspect the athletic and footwear aspect of our business, which is the biggest part of our business, the same thing will happen. But it’s going to take a little while to get through the pipeline – the same way as it did in the golf area.”
At the same time, Stack agreed that he saw parallels around Best Buy’s rebound in the electronics space and Dick’s in sporting goods. Five years ago, Best Buy was “left for dead” by many retail observers, but Stack recently heard a panel on CNBC declare that Best Buy was the “best Amazon-proofed” among retailers. Stack believes Best Buy has benefited first because they “really became maniacally focused on the consumer experience.” Second, Best Buy provided consumers with “confidence they’re buying product from Bets Buy at the right price in the marketplace. They became very transparent from a pricing standpoint.”
Stack added that Dick’s decision to ramp up promotions in the second half represents a similar move.
“The whole idea of getting more promotional is to make sure the consumer knows that they’re buying at the best price,” said Stack. “A number of years ago, 7 8 or 9 years ago, nobody had a smart phone. But now that that’s there and everybody knows that price transparency is so easy to find. So I think Best Buy did all the right things. We’re looking at what they’ve done and we think were on a very similar path to what Best Buy did.”
On August 15, Dick’s reported worse-than-expected results in its second quarter while slashing its outlook for the year as it plans to ramp up its promotional activity in order to attract shoppers and maintain its market share in the challenging retail environment.
Said Stack at the Goldman Sachs conference, “We’re clearly picking up market share in a difficult environment.”
Stack repeated that the promotional climate is expected to be the “new normal for a while” and he isn’t sure when it will lessen. Too much inventory that needs to be cleaned up through promotions or broader distribution as well as “bit of a lack of innovation” are the two main factors holding back any recovery. Said Stack, “We do think it will recover at some point but when that is, I don’t have direct visibility into that.”
Helping “recapture some of the margin pressure we’re feeling within the industry” is expected to be growth among its private brands, which is expected to double over the next five years, according to Stack.
While overall consolidated comps were up 0.1 percent in the second quarter, comps for private brands were up mid-single digits. A highlight has been Celia, which has become Dick’s third largest seller in women’s apparel three years after launch. Stack believes Celia benefited because “women were looking for something different out there in the marketplace.”
The retailer has also had “great luck” with its exclusive golf brands, such as Top Flight, Slazenger and Maxfli, that has made Dick’s one of the largest golf ball manufacturers in the country. Dick’s just introduced a major launch with its Second Skin compression line.
Some opportunities for private brand growth are coming from its recent vendor category segmentation efforts. The move broke up its vendor base into a few that became strategic partners that see greater floor space at Dick’s in return for enhanced marketing efforts and more exclusives. A second group of vendors became “transactional” in nature with some of their tertiary categories narrowed. Twenty percent of its overall vendor mix is being eliminated.
Stack said the retailer continues to work particularly with its strategic partners to “elevate product and bring some pricing stability to the market that just isn’t there today.” Efforts with strategic vendors include bringing in more exclusive product and marketing that product better as well as enhanced marketing and other segmentation efforts to create more differentiation. As a further example of how strategic partners are collaborating, he pointed to how Callaway had come up with an exclusive golf ball to support Dick’s Sports Matter foundation. Said Stack, “They continue to invest in us and we in them.”
Vendors have also become “less and less” restrictive about which items Dick’s can sell online.
Another key priority is to “continue to lead the industry” both in the in-store experience and online “in an omnichannel world.” Continued investments in e-commerce and blending the offline/online will reduce earnings in the short term but benefit the company’s long-term positioning.
In that vein, Stack believes Dick’s has to step up its game against Amazon. He added, “Amazon provides a great consumer experience and we provide a pretty good one. We need to do a better job.”
Other topics Stack explored:
Academy’s competition: While not mentioning Academy by name, Stack said the overall pricing climate in the sporting goods space is “a bit more competitive” in Southern states due to one competitor and he doesn’t “see that ending in any time soon”
Test stores: The recent closing of True Runner and Chelsea Collective locations were largely expected. Stack said that if the company “struck gold,” they would have been rolled out. But the intention of both was to be “merely labs” to test ideas. True Runner helped Dick’s understand the right assortment of shoes as well as accessories for runners inside its flagship stores while Chelsea Collective has similarly provided ideas to support Celia and its overall women initiatives. The core focus remains on the Dick’s flagship chain, Golf Galaxy, Field & Stream and developing the omnichannel experience to be the best in the industry.”
Consolidation expected: Stack sees consolidation not only coming from additional bankruptcies and liquidations but from some retailers closing a number of its locations and some retailers opting not to open stores. Said Stack, “This is a really difficult environment we’re in but we really like the position we’re in in this industry. It’s painful. It’s difficult. It’s not comfortable. But as we look out as we go forward, we love the position we’re in over the next couple of years.”
Online profitability: Operating margins online have improved since taking the business in-house but still lag in-store profitability. Greater scale will be required to further improve online margins.
Reworking stores: Dick’s is taking steps to showcase its private brands at the store level better as well as a few “other brands that have become really hot.” Stores are also looking to add more flexibility to move product around for seasonal needs or to capitalize on changes in category momentum. Stack said, “We’re not married to any idea. We’ve got a blank piece or paper and are looking at this go do to enhance the consumer experience.”
Real estate flexibility: Stack believes Wall Street “doesn’t understand” the flexibility that Dick’s has to rework leases to gain better rates. The company’s move to slow down its expansion is largely due to that flexibility and its belief that ongoing store closures will reduce lease prices. A quarter of its stores come up for renewal over the next three years and half over the next five years.
Photo courtesy Dick’s Sporting Goods
