Dick’s Sporting Goods Inc. reported first-quarter earnings declined 9.5 percent due to the slow start to spring selling due to the extended wintry weather in the Northeast and Midwest. But results still came in at the high end of the downbeat guidance it issued in March.
The largest U.S. sporting goods chain bumped up the low end of its full-year earnings forecast. But Wall Street was apparently hoping for a bigger bounce back in topline sales with concerns lingering around its challenging golf and hunt categories. In midday trading on Tuesday, DKS shares were down a little over 3 percent on the New York Stock Exchange.
In the quarter, earnings reached $63.3 million, or 53 cents a share, versus guidance calling for earnings between 49 to 53 cents. Consolidated same-store sales inched up 1 percent, within its guided range between flat and 2 percent. The small gain came on top of a 1.5 percent comp in the first quarter of 2014.
On a conference call with analysts, Ed Stack chairman and CEO, noted that the company had warned that first-quarter results would reflect “a slower start to the spring selling season” while noting that since February, “this sales trend has notably improved.”
At the Dick's Sporting Goods flagship business, omni-channel same-store sales increased 1.8 percent, driven by a 1 percent increase in sales per transaction, and a 0.8 percent increase in traffic. The gains reflected growth across hard lines, apparel and footwear categories. Excluding hunt and golf, comps would have been ahead 3.8 percent.
Golf Galaxy comps were down 11 percent and in line with the Dick's golf business, although both showed significant sequential comp improvement during the quarter as the weather improved, especially in the northeast. Said Stack, “We’re seeing the golf recovery continue into the second quarter, and expect margin improvement year-over-year in the second quarter.”
The decline still marked a further slowdown from a 7.1 percent same-store sales retreat in Q4. In August 2014, Dick's announced plans to restructure its golf business, consolidating Golf Galaxy merchandising, marketing and store operations into Dick's SG.
Companywide gross margins were down 68 basis points to 29.96 percent, driven by lower merchandise margin, occupancy deleverage and an increase in shipping expenses as a percentage of total sales due to continued growth in e-commerce. DKS officials had warned that merchandise margins would be lower in the first quarter as a result of planned promotional activity earlier in the season.
SG&A expenses shrank 38 basis points to 23.05 percent of sales, primarily due to lower administrative expenses as a percent of sales.
E-commerce saw 32 percent growth, expanding to 8.5 percent of sales compared to 7 percent in the first quarter of 2014.
“We have significantly out paced the market, and have picked up market share in the online space,” said Stack. “We moved up to number 70 on the Internet retailer top 500 list in 2014, and we grew at nearly twice the pace of the industry.”
The company is on pace to transition way from GSI Commerce to move its Dick's SG e-commerce site to its own exclusive platform by January 2017. In the quarter, GolfGalaxy.com was relaunched and a Field & Stream will be introduced later this year. Said Stack, “By having two sites on our own platform, we'll be able to operate and learn from the multi-tenancy dynamics prior to relaunching dicks.com on the same platform.”
Stack also said the company in July will open its first combo store in Mobile, AL combining a Dick SG and Field & Stream next to each other. Interior walls will be opened up in the middle of the store for customers to shop both stores while inside. The Field & Stream locations will focus on hunt, fish and camp product, enabling Dick’s SG to focus more on higher-margin, faster-turning categories, such as women's, youth and team sports. Said Stack, “We believe this will be a very compelling shopping experience, and plan to have four of these combo stores in place by the end of 2015.”
The company opened nine Dick's SG stores and one Field & Stream store in the quarter, generating 95.4 percent new store productivity.
Elaborating on the performance of some categories in the Q&A session, Stack said the company was “pretty pleased” with the performance of athletic apparel, footwear and team sports, noting that they all outpaced the overall 1.8 percent comp gain. Footwear is particularly seeing strength in basketball and cleats.
On the apparel side, Stack particularly called out the progress made in women’s athletic apparel. The launch of the CALIA by Carrie Underwood “is off to a great start” and management expects the private label brand to become the chain’s third largest women’s athletic brand by the end of 2016.
Dick’s SG also during the quarter launched its first campaign targeted directly to women, and is also redeveloping its shopping environment for the athletic female, including updated dressing rooms and improved merchandising presentation. Stack said CALIA’s growth isn’t coming at the expense of its other women’s brands, which are also seeing strong momentum. Said Stack, “Our performance with the brands has been terrific in this category. And we expect it to continue that way.”
Many of the questions from analysts focused on the two laggard categories: golf and hunt.
On the hunt side, Stack said the business has stabilized but it’s still being impacted by a “bit of a hangover” from the prior year when demand was spiked by concerns over tighter regulations over the sale of weapons. Demand was inflated following a series of tragic shooting incidents, including the massacre at the Sandy Hook Elementary School Newtown, CT in December 2012 and the Boston Marathon attack in August 2013. Said Stack, “We think it will start to grow again, be relatively flat through the rest of this year and probably start to grow it next year.”
Regarding golf, Stack said the overall business “gets kind of more air time than it needs” from analysts considering that golf only represents 3 percent of the company’s overall business. But he said that the category has turned “significantly better, relatively down a little bit but close to being flat.”
Margin rates are up 100 basis points in golf the second quarter so far “and that's on a much lower cost structure on how we restructured the golf business last year.”
Stack added that he expects golf to “continue to be difficult” with not much growth expected. However, the success of younger players such as Rory McIlroy, Jordan Spieth and Rickie Fowler has brought some attention to the sport. Said Stack, “We'll have to wait and see longer term how it plays out. But some of the things happening out on tour are really very good for the game.”
Stack also estimated that some of the renewed strength in golf likely reflects pent-up demand with cold weather and snow hitting the Northeast and upper Midwest, where the company has many Dick’s SG and Golf Galaxy locations, in February and early March. Golf courses were opening up late this year as a result and several Dick’s SG stores were closed during some of the storms. Stack said that it’s always difficult to determine how much of an impact the weather has on its overall business.
“We were still pretty happy that we were able to generate a 1.8 percent consolidated comp and come in at the high end of our guidance at 53 cents under some pretty difficult conditions,” said Stack. “That being said, we've got to continue to go and try to make some of that in the second quarter.”
For the second quarter, the company anticipates EPS of 73 to 76 cents a share, which compares to non-GAAP consolidated EPS of 67 cents, excluding year-ago golf restructuring charges. Wall Street’s consensus target for the quarter had been 76 cents a share.
Consolidated omni-channel same store sales in the quarter are expected to be approximately flat to up 2 percent, compared to a 3.2 percent increase in comps in the second quarter of 2014. The guidance assumes “meaningful” World Cup sales comparisons, as well as higher levels of golf clearance in the same period last year.
For the full year, Dick’s SG now expects full-year EPS of $3.12 to $3.20. It previously projected $3.10 to $3.20. In 2014, it earned $2.87, excluding a gain on the sale of an asset and golf restructuring charges. The midpoint of the new range still falls short of Wall Street’s consensus target for $3.19 per share for the year.
Same-store sales are projected to increase 1 percent to 3 percent, consistent with its prior guidance and compared to a 2.4 percent increase in 2014. Gross margin is expected to increase, primarily driven by merchandise margin expansion. SG&A is expected to deleverage due to investments in marketing, coupled with the expenses related to bringing e-commerce on to its own platform.
