<span style="color: #a1a1a1;">Dick’s Sporting Goods Inc. reported its highest-ever quarterly sales and earnings as Americans have embraced home fitness and socially-distanced outdoor activities to ride out the pandemic.
On a conference call with analysts, Ed Stack, chairman and CEO, called out fitness, golf, kayaking, camping, and running among the activities seeing a surge in participation and driving oversized revenue gains for the chain.
“During this pandemic, the importance of health and fitness is accelerated, participation in socially distant outdoor activities has increased, and there has been a greater shift toward athletic apparel and active lifestyle products with people spending more time working and exercising at home,” said Stack. “The majority of our assortment sits squarely at the center of these trends.”
Shares of Dick’s rose Wednesday by $7.32, or 15.7 percent, to $53.99 on the New York Stock Exchange.
Same-store sales grew 20.7 percent in the quarter, driven by a 194 percent hike in e-commerce sales in the three months and double-digit in-store comps in June and July as stores reopened.
On an adjusted basis, non-GAAP earnings grew 150 percent to $281.7 million, or $3.21 per share, well ahead of Wall Street’s consensus target of $1.26.
For the first three weeks of the third quarter, consolidated comp sales increased 11 percent as softness across key back-to-school and team sports categories were offset by continued favorable trends in fitness and socially-safe outdoor categories.
Stack added the comp growth came with “continued margin rate expansion” with “a significant part of back-to-school already behind us.”
E-Commerce Revenues Jump 194 Percent
In the quarter ended August 1, overall sales jumped 20.1 percent to $2.71 billion, easily topping Wall Street’s consensus estimate of $2.46 billion.
The 20.7 percent overall comp gain came despite approximately 15 percent of the company’s stores closed, on average, over the period. By the end of June, all stores had reopened.
In the Q&A session, Dick’s officials concurred that the in-store comp growth in June and July was around 30 percent as stores reopened strongly. On its first-quarter conference call on June 2, Dick’s had said consolidated same-store sales were down 4 percent in May.
The net comp gain was driven by a 17.9 percent increase in average ticket and a 2.8 percent increase in transactions. All three primary categories, hard lines, apparel, and footwear, saw growth.
But the star was e-commerce with online penetration for the quarter growing to approximately 30 percent of total sales, up from 12 percent a year ago. Mobile penetration accounted for over 50 percent of online sales.
The 194 percent gain benefited from the rollout of Curbside Contactless Pickup. Lauren Hobart, president, said the customer response to pick-up “remained very strong.”
She added that e-commerce merchandise margin “expanded meaningfully,” which, along with higher penetration of curbside and BOPIS (buy online, pick-up in-store), drove a significant improvement in e-commerce gross margin in the quarter.
Dick’s also continued to reduce delivery times to customers despite e-commerce demand remaining “at unprecedented levels,” noted Hobart. More than 75 percent of online sales were fulfilled by inventory from stores.
“This success online is a direct result of the technology and fulfillment investments we have made over the years, as well as better integration of our digital channels as we work to relentlessly improve the athlete experience, enhance our profitability and build a best-in-class omnichannel platform,” said Hobart.
Stack called out the strong response from its vendor partners responding to inventory shortages as a result of the strong sell-throughs.
“Over the past few months. the partnerships demonstrated by our strategic vendors has been unparalleled,” said Stack. “During Q2, we leveraged these strong vendor relationships and our private brand supply chain to aggressively chase product in the most in-demand categories.”
He added that certain categories in the marketplace “were supply-constrained, therefore less promotional,” helping drive merchandising margin rates up by 325 basis points during the quarter.
Merchandise Margins Climb 325 Basis Points
The merchandise margin rate expansion was primarily driven by fewer promotions, as well as better than anticipated sales and margin on merchandise nearing end-of-life.
Overall gross margins in the quarter improved 456 basis points to 34.53 percent of sales, driven by merchandise margin rate expansion as well as leverage on fixed occupancy costs of 204 basis points.
This was partially offset by higher shipping expenses and e-commerce fulfillment costs as a result of meaningfully higher e-commerce sales growth, as well as the fixed costs associated with two e-commerce fulfillment centers that opened in the third quarter last year.
Gross profit in the latest quarter included $10 million of incremental COVID-19-related compensation and safety costs.
SG&A expenses were reduced 305 basis points to 20.01 percent of sales due to leverage on the significant sales gain. The improvement came despite $32 million of incremental COVID-19-related compensation and safety costs and $12 million associated with the change in value for its deferred comp plans, resulting from the significant increase in overall equity markets in the quarter. These expenses were partially offset by expense reductions driven by the temporary store closures.
Earnings before taxes jumped 161.2 percent to $397.8 million from $246.7 million.
On an adjusted basis, non-GAAP earnings grew 150 percent to $281.7 million, or $3.21 per share, from reported earnings of $112.5 million, or $1.26, in the 2019 second quarter. Results were far ahead of Wall Street’s consensus target of $1.26.
Adjusted results include approximately $42 million of incremental employee compensation and safety costs related to COVID-19 during the current quarter.
Non-GAAP results exclude the non-cash amortization of the debt discount associated with the company’s convertible senior notes, as well as the share impact of the convertible note hedge purchased by the company, which is anti-dilutive for GAAP purposes. Net earnings including these items $276.8 million, or $3.12.
The company ended the quarter with $1.1 billion in cash and cash equivalents and no outstanding borrowings under its $1.86 billion revolving credit facility, repaying the $1.4 billion of borrowings that were outstanding at the end of the first quarter. Dick’s reinstated its dividend program and paid $26 million in quarterly dividends.
Total inventory decreased by 12.2 percent at the end of the quarter. Lee Belitsky, EVP and CFO, said, “Looking ahead, our inventory is clean, and we will continue to optimize our assortment to improve our in-stock positions in the most in-demand categories.”
DSG Becomes Dick’s Largest Private-Label Brand
Other contributors to the quarter’s record performance were its owned brands, which outgrew the company’s average growth by approximately 500 basis points while supporting differentiation. Hobart called out the strong performances by Calia and the new DSG brand, which represented the second and third largest women’s athletic apparel brands, respectively, during the quarter. Across categories, the broad DSG collection has become Dick’s largest private brand, surpassing Field & Stream, only one year after launch.
In marketing, Dick’s Scorecard loyalty program continues as a major sales driver. The program has over 20 million active users, accounting for more than 70 percent of sales. Data from the program is used to support personalized messages with its digital and direct marketing efforts.
Among campaigns, the “See You Out There,” golf-specific and back-to-school campaigns resonated with customers. Said Hobart, “We paired these larger brand campaigns with more tactical marketing around store openings and curbside pickup to ensure our athletes knew we were there to get the product to them wherever, and whenever, they wanted it.”
Dick’s also credited the strong performance to efforts by in-store employees who have been receiving updated training in recent years. Employees returned from furlough and were repaid for lost wages. To recognize their contributions, the retailer also recently announced its 15 percent pay-enhancement program for hourly store and distribution center employees and will be extending it through the end of the year. Said Hobart, “Our teammates have worked tirelessly to adapt to a constantly changing landscape and have demonstrated an unrelenting commitment to serve our athletes and communities safely.”
Despite the strong quarterly performance, Dick’s said it would continue to not provide an outlook for the year given the uncertainly around the pandemic and economic stimulus efforts.
Stack concluded in his formal comments, “As I look at our business, we’re in a great lane right now. We have reopened our stores and remain committed to the procedures to protect our teammates and athletes’ health and safety. We’ve enhanced our e-commerce offering with curbside pickup and faster shipping. Our product assortment is well-tailored to the recent consumer trends, supported by strong relationships with our key brands. And importantly, we’re in a strong financial position, having paid our line of credit to zero, and have approximately $1 billion in cash. We’re really in a great position.”
Inventory And Back-To-School Challenges
In the Q&A session, Dick’s officials were asked several questions about challenges overcoming inventory shortages as well as any fallout from the softer back-to-school selling and fall team sports seasons.
On inventory, Stack said Dick’s expects to be in a better position in categories such as fitness, bikes and golf toward the end of September and into October. He noted that a number of fitness and bike products are its owned brands and that has enabled them to respond faster.
He said fresh supply is already steadily arriving at stores but it hasn’t been able to catch up to demand. Stack said, “If you’re going to walk in our store, it’s still going to look like our fitness business is really depleted, but the flow of product we have coming in, it’s kind of going out as fast as it’s coming in. We expect the trends from a sales standpoint in those categories to continue.”
Regarding team sports, Stack said the overall category “is not very good right now” with the exception of baseball and is likely to “continue to be difficult through all of Q3.”
He noted that August has traditionally accounted for the highest-concentration of fall team sports and is also the major month for back-to-school items such as backpacks. As such, the retailer is already past the toughest comparisons for both areas and still managed an 11 percent gain in the first three weeks of the third quarter.
The team sports category is performing “meaningfully” better in regions that are allowing team sports play. He said his team will be using 2019 as a measure to plan the fall 2021 season and expects to see a bounce-back year for those categories. Stack said, “If a lot of the pandemic is behind us and kids are back in school and playing sports and everyone feels safe, we think there’s a big upside in the team sports and the back to school business next year.”
At the same time, Stack noted that Dick’s sees the fitness and socially-safe outdoor activities that people have lately embraced as “pretty sticky” and includes “some great family activities” that are expected to continue to draw interest in the future. He suspects the health benefits from many of the activities will also support continued participation.
Stack said, “That doesn’t mean that we’re going to have a lot of marathon runners. But people are going to get out and they’re going to walk. They’re going to play on treadmills. They’re going to lift some weights, even if they’re lightweight kettlebells…People are going to try to be healthier and we don’t see that changing even when COVID-19 is in our rearview mirror for quite a while.”
Stack also doesn’t the second half will become more promotional because many of Dick’s categories are trending well. Added Stack, “I think vendors are being very cautious to make sure that the market doesn’t get flooded with products that need to be cleaned up going into next year. So I think everybody’s taking a pretty conservative approach from an inventory standpoint, and inventory will be in very good shape by the end of the year.”
Among other categories, Stack said the golf category “has been great” at both Dick’s and Golf Galaxy. He added, “There’s a number of young people who have come into the game because they’re not playing football or soccer or some other sports.” He expects that will continue as team sports play remains challenging and he also expects golf to gain a boost because of the attention provided by the ongoing PGA Tour that will be followed by the US Open in September and Masters in November. The CEO further said that while colder temperatures will impact play in the northern parts of the country, Dick’s has numerous stores in the South and West that enable people to “to get outside 12 months a year.”
Asked about hunt, Stack said the retailer is still planning to “significantly reduce” the category within its stores despite the overall rebound in the category seen in recent months.
Dick’s was also asked about the opening in June of two new discount-focused store concepts — Dick’s Sporting Goods Warehouse and Overtime by Dick’s Sporting Goods. The retailer opened five Warehouse and three Overtime locations. Stack said both concepts are in their “infancy stage” but enable the chain to clear merchandise from its traditional stores to make room for new product and helps margins. Said Stack, “We’re able to realize a higher margin rate in these stores than if we kept it in our store and tried to clean it.”
He added the concepts are “very much in the test phase” and it’s too soon to evaluate their expansion potential.
Photo courtesy Dick’s Sporting Goods
