Boosted by a “very strong” back-to-school selling season, Dick’s Sporting Goods posted above-plan third-quarter results, lifting its guidance for the year. Lauren Hobart, president and CEO, told analysts, “We are pleased with how our consumer is holding up within the sporting goods industry and then particularly that they’re choosing Dick’s increasingly to meet their needs.”
Hobart said that Dick’s continues to gain share, benefiting as consumers continue to prioritize healthy and active lifestyles.
“They’re prioritizing team sports, outdoor living, running, walking, all of those things,” said Hobart. “And so, we felt in the past quarter particularly pleased with an increase in transactions and tickets and the fact that our consumers are not trading down. That our consumer has held up very, very well.”
She said Dick’s overall continues to benefit from the in-store experience and increasingly differentiated mix, supported by aggressive efforts to clearance efforts to make room for new product. Hobart said, “One of our core operating philosophies is always to be very decisive and move inventory so that we can make room for clean and fresh receipts. That’s what drove our comp this past quarter and what’s been driving our comp for some time.”
Shares on Tuesday rose $2.55, or 2.1 percent, to $121.56. The stock’s 52-week range is between $100.98 and $152.61.
Looking at the fourth quarter, Hobart stated, “We are very excited about what we have within our control for Q4. Our products are in stock. We’ve got tremendous gifts.”
The guidance assumes same-store sales moderate from the gain seen in the third quarter, but Hobart said that only reflects some caution due to the challenging macroeconomic environment. Hobart said, “We compete with everyone in the world during the fourth quarter. Also, the consumer is going through an awful lot and we’re trying to be cautious. And so, I wouldn’t read into anything other than we are trying to model in an appropriate level of caution due to the uncertain macroeconomic environment.”
Third-Quarter Comps Climb 1.7 Percent
In the third quarter, sales advanced 2.8 percent to $3.04 billion, topping analysts’ consensus estimate of $2.93 billion.
Same-store sales improved 1.7 percent against a gain of 6.5 percent in the 2022 third quarter. Analysts on average had expected a decline of 1.9 percent.
The comp gains were driven by a 1.1 percent increase in transactions and 0.6 percent climb in average ticket.
Hobart said, “During the quarter we saw more athletes [customers] purchase from us while spending more each trip.” Back-to-school categories drove the gains. She said, “Collectively, that is footwear and apparel and hydration, which is doing incredibly well. And then other accessories like backpacks, socks and those sorts of things. So, we’re very pleased with how our key categories performed in Q3.”
Hobart also said higher-ticket categories such as fitness and bikes that experienced a surge in sales during the pandemic continue to stabilize. She said, “Across the board, they remain significantly higher than our pre-COVID levels. We do expect long-term growth in those categories. We’re just managing through them. But they are a small percentage of our business relative to the rest.”
Non-comp sales growth of roughly 110 basis points this quarter was primarily driven by sales at Moosejaw, the outdoor specialty banner acquired by Dick’s this past spring business that’s being restructured.
Business Optimization Plan
The latest quarter included charges related to the business optimization plan in the quarter included $23.3 million of severance-related costs, $22.9 million of non-cash impairments of store and intangible assets and a $6.3 million write-down of inventory at Moosejaw. The program was first announced when Dick’s reported its second-quarter results.
The charges covered the elimination of certain positions primarily at its customer support center as well as the integration of its Moosejaw operations and other charges to optimize the cost structure of its outdoor specialty business that also includes Dick’s homegrown Public Lands’ concept. As part of the plan, Dick’s plans to close ten of its 14 Moosejaw store locations by early 2024 as well as close Moosejaw’s headquarters in Madison Heights, MI.
Navdeep Gupta, CFO, told analysts the moves are focused on “better aligning our talent, organizational design and spending in support of our most significant growth opportunities, while also streamlining our overall cost structure.”
Outdoor Specialty Business Restructuring
Specifically regarding the outdoor specialty integration, Hobart said integrating the operations of Moosejaw and Public Lands will “enhance our ability to fulfill outdoor athlete demand more effectively. This new structure immediately improves operational efficiency and strategically positions this business for profitable growth within the $40 billion outdoor industry.”
Gupta added that Dick’s plans call for “continue testing” and opening more stores targeting the outdoor space. Public Lands has seven stores currently and Moosejaw will be left with four following the closures.
He said Dick’s still sees a growth opportunity targeting the “outdoor athlete.” He added, “That industry is a $40 billion highly-fragmented industry, but [there’s] not a clear leader So as we see the collective capability that we have between the Moosejaw brand as well as the Public Lands brand, we are extremely excited about that opportunity to continue to differentiate and provide a much more synergistic way of serving that athlete as we look forward.”
Dick’s also currently anticipates additional pre-tax charges of approximately $10 million during the fourth quarter of 2023 related to its actions to optimize the outdoor specialty business and plans to continue its business optimization review, which it expects to complete during fiscal 2023
Adjusted Profits Top Guidance In Third Quarter
Including the business optimization plan charges, net income declined 11.8 percent in the third quarter to $201 million, or $2.39 a share, from $228 million, or $2.60, a year ago. On an adjusted non-GAAP basis excluding the charges, earnings rose 5.3 percent to $240 million, or $2.85 a share, exceeding analysts’ consensus target of $2.46.
On an adjusted basis, gross margins improved 88 basis points to 35.10 percent from 34.22 percent a year ago. The improvement was driven largely by 78 basis points leverage from lower supply chain costs. Merchandise margins improved 23 basis points, primarily driven by the anniversary of clearance activity from last year. These factors offset higher shrink by approximately 50 basis points. Excluding shrink, merchandise margins would have increased over 70 basis points. Navdeep Gupta, CFO, told analysts, “Combating theft remains a top priority and we continue to invest in efforts to keep our store teammates and athletes safe.”
On a non-GAAP basis, SG&A expense increased 7.4 percent to $730 million and deleveraged 102 basis points as a percent of sales to 23.99 percent from 22.97 percent in the year-ago quarter. Investments in wage rates, talent and technology to support the customer experience as well as in marketing were partially offset by $8.2 million of expense reductions or 26 basis points of leverage, associated with changes in the investment value of the retailer’s deferred compensation plan, which is fully offset in other income.
Driven by sales and gross margin gains, along with lower interest expense tied to the retirement of convertible senior notes, non-GAAP EBT (earnings before taxes) were $321.1 million, or 10.6 percent of sales, in the latest quarter, up from $304.2 million, or 10.3 percent, a year ago.
New Growth Concepts
Hobart said the retailer’s newer retail formats “have proven to be tremendously successful, and are a key part of our future as we continue to reimagine our store portfolio and footprint.”
Hobart said the company “continues to be pleased with the results” coming from the House of Sport concept, which features experiential offerings such as a climbing wall, golf bays with TrackMan simulators and batting cages. Some locations include an outdoor ice rink.
Hobart said healthy comps continue from the three initial House of Sport stores that opened more than a year ago as well as the new stores that opened this year. House of Sport is also offering Dick’s opportunities to attract new brands as well as to secure premium products from its larger brand partners.
“House of Sport is unique in that it is totally rooted in sport, and it’s a fantastic destination for all of our brands,” said Hobart. “So, if you look at some of our bigger brand partners, they’ve said it’s one of the best presentations of their brands that they see. It’s also an opportunity because of the size and the level of service where we can bring in new and emerging brands. Through that channel, we’ve brought in brands like FP Movement and On and Hoka. And we then have the ability to transfer those brands down to the rest of the chain as we become partners. Our vertical brands also have an incredible presence in our House of Sport stores. We leave with them across the board in many of our entrances and they’re doing quite well, too. So overall, it’s a fantastic presentation and really puts brands in their best light.”
Dick’s has 12 House of Sport locations currently, of which nine opened this year. Approximately 10 are planned for 2024, including openings at the Prudential Center in Boston as well as locations in Pittsburgh, Miami and Tampa. Hobart said, “We continue to expect that by 2027, we will have between 75 to 100 across the country.”
Dick’s is rolling out next-generation Dick’s flagship stores integrating some elements from House of Sport. Five locations were converted in the quarter and another three earlier this month for a total of 11 next-generation locations currently open. Hobart said, “We are pleased with the performance and confident in the long-term opportunity of this new 50,000-square-foot prototype.”
Golf Galaxy continues to expand with more experiential Galaxy Performance Center formats. During the third quarter, seven new Performance Centers opened, expanding the Golf Galaxy chain to 104 locations, including 13 Performance Centers. Hobart said, “We believe there’s a significant long-term growth opportunity in golf. Over the next four years, we expect to have as many as 40 to 50 Golf Galaxy Performance Centers across the U.S., including about 10 new locations in 2024.”
Digitally, Dick’s continues to invest in technology to drive online engagement, adding 1.6 million new “omnichannel athletes,” or customers shopping both in-store and online in the quarter. Hobart said, “Omni-channel athletes make up the majority of our sales and they spend more and shop with us more frequently than single-channel athletes. As we invest in data science and personalization, we’re excited to continue building one-to-one relationships and better serving these athletes.”
Dick’s also continues to invest in offering multiple delivery and pickup options by expanding same-day delivery. For last-minute shoppers, Dick’s this year is offering same-day delivery service up until 12 noon on Christmas Eve.
Outlook
For the year, Dick’s now expects non-GAAP EPS in the range of $12 to $12.60 compared to prior expectations of $11.50 to $12.30. Comparable store sales are now projected in the range of positive 0.5 percent to positive 2 percent, compared to prior expectations of flat to positive 2 percent. In the last nine months, comps were up 2.3 percent.
At the midpoint, non-GAAP EBT margin is expected to be approximately 10.4 percent for the year compared to prior expectation of 10.2 percent. Modest improvement is expected in gross margin for the full year, which continues to include an approximate 50 basis points unfavorable impact from higher shrink compared to 2022. SG&A expenses are expected to deleverage for the full year, primarily due to growth investments.
For the fourth quarter, Dick’s expects continued gross margin and merch margin expansion on a year-over-year basis with some improvement versus the Q3 expansion. SG&A is expected to deleverage in Q4 by a similar magnitude as Q3.
Photo courtesy DKS
