Dick’s Sporting Goods Inc. reported lower-than-expected quarterly results as fewer customers visited its stores due to cold and wet weather this Spring as well as overall weakness in consumer spending. The flagship Dick’s SG chain saw a small comp decline due to particular weakness in golf equipment, outdoor equipment, and fitness categories.
Due to its “belief that consumers will remain relatively cautious” in the second half as well as the need for further investments to jumpstart traffic, Dick’s SG also revised its full year guidance to a range of $2.60 to $2.65 per share. Previously, Dick's SG had projected EPS of $2.84 to 2.86 for 2013.
Consolidated same-store sales are now expected to be flat to up 1 percent for 2013 compared to original expectations of a 2 percent to 3 percent increase.
Share of Dicks SG on Tuesday fell $3.95 to $46.64, or 7.8 percent, in trading on the New York Stock Exchange.
“We believe the challenges we are facing today are short-term in nature and will not impact our long-term profitable growth,” said Ed Stack, chairman and CEO, on a conference call with analysts. “There remains significant runway in our stores, e-commerce, and our new concepts.”
In the second quarter, earnings reached $88.9 million, or 71 cents per share, excluding an asset impairment charge, missing company's expectations provided on May 21, of 75 cents to 77 cents. Earnings were up 9.3 percent versus the year-ago net of $81.3 million, or 65 cents, which excluded an impairment charge related to the company's investment in JJB Sports.
Sales in the latest quarter grew 6.6 percent to $1.5 billion. Adjusted for the shifted calendar due to the 53rd week in 2012, consolidated same store sales slipped 0.4 percent, compared to the company's guidance of an approximate 2 to 3 percent increase. Second quarter 2012 consolidated same store sales increased 3.8 percent.
Shifted same store sales in the second quarter for the flagship Dick's SG concept increased 0.1 percent, driven by a 2 percent increase in sales per transaction and by a 1.9 percent decrease in traffic. Golf Galaxy decreased 6.1 percent on a shifted basis. Unshifted consolidated same store sales increased 1.2 percent, compared to the company's guidance of an approximate 3.5 to 4.5 percent increase. Unshifted same store sales for Dick's SG increased 1.9 percent while Golf Galaxy decreased 7.2 percent.
On the bright side, e-commerce, which represented 5.6 percent of sales in the quarter, “continued to deliver strong results while increasing in profitability,” said Stack. Better ship-from-store capabilities is particularly helping the segment.
Operating margins also increased year-over-year. Gross margins grew 14 basis points to 31.3 percent, primarily driven by merchandise margin expansion of approximately 31 basis points, partially offset by occupancy deleverage. SG&A expense was trimmed slightly to 21.49 percent of sales compared to 21.6 percent a year ago, primarily due to lower incentive compensation and the anniversary of a contribution made to the Dick’s Sporting Goods Foundation in the second quarter of last year.
From a category standpoint, hunting, athletic footwear and apparel delivered a mid-single-digit comp increase on a combined basis.
“Hunting continued its strong growth, driven primarily by firearms and ammunition,” said Stack. “Athletic footwear was solid across men's, women's, and youth. Apparel sales benefited from an increase in licensed apparel due to the NHL playoffs as well as growth in outdoor and the athletic apparel areas. We continue to be excited about these categories.”
On the downside, traffic was impacted “a sluggish consumer environment, higher levels of precipitation and cooler weather, cooler temperatures, and challenges in select categories,” said Stack.
The two categories most impacted were golf equipment and outdoor equipment such as water sports, camping, and bikes. Said Stack, “We believe the relatively wet and cool conditions discouraged participation in these areas. In addition to the weather, a weaker golf product cycle compared to the strong innovations we've seen in the last two years compounded the challenges from fewer rounds played.”
Fitness also continued to show declines “and we now expect the trend to continue into 2014,” said Stack.
Overall, golf equipment, outdoor equipment, and fitness together impacted same-store sales by approximately 330 basis points, DKS officials indicated.
“We also believe the sluggish consumer environment is impacting our overall business and we expect the consumer to be cautious in the second half of the year,” added Stack.
To boost sales in the back half, Dick’s SG plans to increase its advertising levels, add store payroll to improve the customer experience and continue to invest in growth categories such as hunting, athletic apparel, athletic footwear, and the high school athlete. Added Stack, “We are also strategically adding more products at opening price points and we have reduced key categories in selected markets to react to the pricing strategies of competitors.”
Inventory per square foot increased by 5 percent at the end of the quarter. Clearance inventory was down 4.1 percent on a square foot basis. Said Andre Hawaux, Dick’s SG’s CFO, “We are comfortable with the quality of our inventory. Current inventory levels are positioned for our second half expectations and new concepts.”
Regarding expansion, new store productivity of its new Dick’s SG Stores was 85.4 percent in the second quarter compared to 102.2 percent in the second quarter last year. The lower new store productivity is “in line with the performance of the business this quarter,” Joe Schmidt, the retailer’s president and COO, said on the call.
Seven Dick’s SG stores were opened in the quarter, to bring the chain’s count to 527. A total of 40 are set to open this year.
Four stores will be fully remodeled this year with the remodels focusing on strategic growth categories such as youth apparel and featuring Nike, Under Armour, and Adidas Shops. Fifty-three of the planned 75 partial remodels Dicks’ SG had projected for 2013 have been completed. Said Schmidt, “We are pleased with the early results of these remodels and expect to complete the remaining 22 partial remodels by the end of the third quarter.”
At the quarter’s close, it had 183 shared service footwear decks, 222 Nike Field House shops, 174 Under Armour shops, and 91 North Face shops. By the end of the year, the retailer expects to have approximately 220 shared service footwear decks, approximately 290 Nike Field House shops, and approximately 240 Under Armour shops.
In the third quarter, approximately 80 seasonal outpost shops with the North Face will be added in addition to its existing shops. A seasonal outpost shop consists of a permanent back wall being installed in the seasonal section of the store. The wall will be branded for North Face during the winter and incorporate appropriate photography such as football or baseball to suit appropriate activities in other seasons. At the end of the year, Dick’s SG expects to have approximately 90 North Face shops and 80 seasonal outpost shops.
Two True Runner running stores are open with one more set to open in 2013. The first Field & Stream store, opened in mid-August in Cranberry Township, PA, exceeded expectations and was described by Schmidt as “the best grand opening in the history of the company.” A second will open in the fourth quarter.
For the third quarter, Dick’s SG now expects earnings to decline slightly, to a range of 37 to 39 cents a share, from 40 cents in the 2012 third quarter. Wall Street’s consensus estimate for the quarter had been 47 cents. Same store sales adjusted for the shifted calendar are currently expected to be approximately flat to an increase of 1 percent in the quarter, or decrease approximately 2 to 3 percent on an unshifted basis, as compared to a 5.1 percent increase in the third quarter of 2012.
For the fourth quarter, the company now anticipates reporting EPS between $1.04 to 1.07, slightly ahead of $1.03 netted in the 2012 fourth quarter. Same store sales adjusted for the shifted calendar are expected to increase approximately 3 to 4 percent, or approximately negative 2 to negative 1 percent on an unshifted basis, as compared to a 1.2 percent increase in the fourth quarter of 2012.
Asked in the Q&A session to elaborate on the pricing competition coming from competitors, Stack said the pressures are coming from “select areas, so this isn't that widespread. But there's just some selected areas in more the southern part of the country that we felt that we needed to take some pricing action based on action that some competitors have taken.”
Opportunities to expand its reach in opening price points include athletic footwear, “some of the athletic apparel areas,” youth apparel, as well as outdoor equipment, citing family camping.
Stack said golf, which accounts for a little less than 20 percent of Dick SG’s business, has been hurt by a lack of innovation this year. But the poor weather particular hurt rounds played this spring in the Midwest, Northeast and the mid-Atlantic after warm weather supported play last year. Stack joked, “Quite honestly we weren't quite as smart as we looked last year and we are not nearly quite as dumb as we look this year.”
On fitness, Stack said people are “just working out and exercising differently than they have in the past,” citing the success of LA Fitness and other gyms as well as the popularity of Pilates, yoga and spinning classes.
Asked whether Dick’s SG was rethinking the size of its model given the generally persistent weakness in golf, outdoor and fitness categories that’s hurting traffic, Stack still believes the chain has “other opportunities to move that square footage.”
As an example, he said women's athletic studio concepts tested with Under Armour “have done extremely well.” The youth business is likewise “doing extremely well,” led by Nike, Under Armour and Reebok.
Overall, Stack said innovation on athletic footwear and apparel side remains solid. Under Armour’s Alter Ego collection of compression apparel featuring Superman, Batman and other superheroes has “been just fantastic,” and the cleat business has received a spark from some hot product from UA and Nike. Dick’s SG is also “really excited about the innovation in the expansion that we put around the basketball business going forward.”
Asked specifically about running footwear, Stack the category “is still okay,” although it’s “not growing quite as fast as it had been but we are still pleased with the running business.”
Stack also said that while the hunt category is being supported by concerns around the possible scarcity of ammunition, the business is “very solid” overall and also encompasses sporting, clay, skeet, target shooting. Added Stack, “We think this is a business that definitely has some legs in it and we have got a core competency here and we think that there is a great opportunity here going forward.”
While the company doesn’t generally discuss sales trends in the current quarter, Stack also indicated that Dick’s SG’s back-to-school business in the third quarter has “so far has been a bit better than we anticipated,” with broader-based growth versus the second quarter. The golf category in particular has been helped by excitement around the new TaylorMade SLDR driver.
But he said the company is “not far enough into the quarter to be too terribly excited” about the improvement, and continues to be more concerned over generally sluggish consumer spending.
“It's been pretty well chronicled the consumer seems to be a bit sluggish and may have other priorities right now in the short term of where they want to spend their money,” said Stack.
