Dick’s Sporting Goods reported earnings that easily topped Wall Street’s targets, but sales came in well below as weakness from Under Armour continued to place a drag on sales.

Same-store sales dropped 4.0 percent on a 13-week to 13-week comparable basis, missing Wall Street’s average target calling for a decline of 0.6 percent.

On a conference call with analysts, Ed Stack, CEO, said the strategic decisions regarding the retailer’s hunt and electronics categories accounted for about half of the comp decline.

Dick’s had previously announced that it was exiting the low-margin electronics category that it felt had marginal-growth potential for the chain.

The retailer also previously said it would be “downplaying” the hunt category not only due to overall sluggishness in the category but the impact of the retailer’s widely-covered decision earlier this year to stop selling firearms to individuals under age 21 and stop selling assault-style weapons at Field & Stream. The decision, which drew backlash in the hunt community, came after the February school shooting in Parkland, FL.

The surprise in the quarter was the continued deceleration in sales at Under Armour, which accounted for the rest of the decline. Indeed, excluding Under Armour, hunt and electronics, comps would have been ahead 1 percent. The weakness has been attributed to Under Armour’s decision to expand distribution to Kohl’s.

The weaker-than-expected comps were particularly dismaying since much of retail has been delivering healthy comps as consumer spending has picked up with the booming economy. On Thursday, shares of Dick’s closed at $35.60, down 79 cents, or 2.2 percent.

In the Q&A session, many of the questions were fixated on Under Armour. Stack said the company is “repositioning” the Under Armour business, including gaining more exclusives from the brand while finding other product to fill traditional Under Armour space.

“Our Under Armour business has been difficult,” said Stack. “It was based on the change in distribution, which I understand why they did it. But they had a significant change in our distribution strategy, and that has impacted our Under Armour business. We’re in the process of replacing that business and also looking at how we can grow the Under Armour business going forward. We’re pretty excited about their pipeline beginning in ’19 of things that we think we can start to replace some of that Under Armour business.”

Overall, he said Under Armour is working on better segmentation with Dick’s and the exclusive merchandise will be more “foundational product” geared toward the “real athlete who is looking to use the product to actually perform in as opposed to look like they perform in.”

Dick’s merchants are particularly “excited” about innovation coming down the pipeline from Under Armour. This includes the Hovr shoe, which Stack said fits “more of a premium authentic athletic environment as opposed to more of a discount mid-tier distribution.”

Dick’s also plans to expand Under Armour’s line with the actor Dwayne “The Rock” Johnson that is also an exclusive. Said Stack, “He’s a hot commodity right now; everybody loves them.”

But Stack predicted declines from Under Armour for the rest of the year would only say the brand would be “much less of a drag” in the first quarter of 2019, and declined to say whether Under Armour will return to growth in 2019. Said Stack, “We’ve been great partners with Under Armour, they’ve been great partners with us and we’re both working on this to get this to be a growth vehicle for both of us again.”

Stack spent much of the call stressing that except for Under Armour, hunt and electronics, the retailer’s business is healthy.

Stack said, “Notwithstanding these challenges, the health of our core business is relatively strong, and we’re confident sales trends will improve next year as these headwinds are expected to subside.”

Highlights in the quarter included double-digit growth in private label as well as double-digit growth in athletic apparel, excluding Under Armour. Footwear and golf delivered solid gains in the quarter and customers are responding well to the chain’s key-item focus.

The CEO also noted that while the Street might have been disappointed with the 4 percent comp decline, Dick’s raised its earnings guidance for the second quarter in a row with benefit of improved product, inventory discipline and fewer promotions. Overall, Stack remains bullish on the business.

“If we weren’t enthusiastic about what’s going on in our business, we wouldn’t have raised our guidance for the second quarter in a row,” said Stack “And if we weren’t excited about our business, we would’ve bought back $182 million worth of stock in the first two quarters. So I think they’re a couple of pretty bullish signs of how we feel about our business going forward.”

Under the company’s revised outlook for the year, Dick’s now expects:

  • EPS in the range of $3.02 to $3.20, up from $2.92 to $3.12 under its previous guidance.
  • Same-store sales to decline 3 percent to 4 percent. Guidance had previously called for same-store sales to range between flat to a low-single-digit decline. On a 52-week to 52-week basis, comps dipped 0.3 percent in 2017
  • Net capital expenditures are now projected to be approximately $225 million, down from previous guidance of approximately $250 million. In 2017, net capital expenditures were $373 million.

In the quarter ended August 4, earnings rose 5.9 percent to $119.4, or $1.20, versus adjusted earnings of $104.8 million, or 96 cents, and well ahead of Wall Street’s target of $1.04. After non-recurring items, reported earnings in the year-ago period was lifted to $112.4 million, or $1.03.

Revenues inched up 1.0 percent to $2.18 billion, short of analysts’ average expectations of $2.24 billion. Based on an un-shifted calendar, consolidated same-store sales for the second quarter decreased 1.9 percent. Second quarter 2017 consolidated same-store sales increased 0.1 percent.

Adjusted for the calendar shift, e-commerce sales increased 12 percent. E-commerce accounted for approximately 11 percent of total sales, compared to approximately 9 percent a year ago.

Transactions declined 4.7 percent, driven partially by the continued refinement in the hunt business and fewer promotions, and average ticket increased by 0.7 percent due primarily to a less promotional environment.

Private Label Continues To Shine

Best performing categories included outdoor apparel and fitness equipment. Licensed sales also comped positively, benefiting from the World Cup. The double-digit growth in private brands again significantly outpaced the company’s average, driven by continued strength in Calia and its new brands.

Stack said that in addition to allocating premium floor space to the retailer’s own brands, existing brands have been expanded to new categories. For example, Calia’s entry into swim has been successful. Additionally, the Team Sports license agreement with Adidas significantly expanded with American football becoming an exclusive to Dick’s.

Exclusivity remains a priority, Stack said, and Dick’s expects the momentum seen in private label to continue with the help of new brands, including the new Alpine designed outdoor brand launched this third quarter. Said Stack, “We continue to believe we can grow our private brand business to $2 billion over time.”

Combined with the double-digit growth in athletic apparel excluding Under Armour, Lee Belitsky, CFO, said management was “really very pleased with our apparel business for the quarter.”

Belitsky also noted that athletic footwear and golf “were also areas of relative strength for the quarter.”

Overall, Stack said Dick’s is ”reallocating valuable floor space to growth categories and brands that are outperforming,” including both private labels such as Calia as well as brands including Nike, Adidas Brooks and New Balance.

“We remain pleased with the improved products we’re seeing from many of our key partners and private brands, and are optimistic about the pipeline as we look to the second half of the year and into 2019,” added Stack.

Lauren Hobart, president, said the company feels it’s delivering a “much stronger more curated assortment” with a greater focus on key items.

“We’ve narrowed and removed complexity from our assortment, which has allowed us to add more depths behind key items of significant business drivers,” she said. ”This increased depth is leading to stronger in stock position, which is resulting in an improved customer experience.”

On the challenged categories, Stack said Dick’s is evaluating strategies across banners on hunt. This includes optimizing net assortment and reallocating floor space to categories that drive profitable sales growth.

Stack stated, “Later this quarter, we will remove virtually all of the hunt products from 10 Dick’s stores with the category with ‘significantly underperforming’ and replace them with products and in-store experience that are most relevant to our athletes in those markets. Some examples include an elevated outerwear in license shop assortment and more experiential elements such as the HitTrax batting cages in our baseball area. We are executing our strategies to better navigate the dynamic retail environment and ensure the long-term success of Dick’s Sporting Goods.”

On the positive side, Stack noted that the hunt and electronics categories are approximately 1,700 basis points lower than the company average, and reducing exposure to those categories is helping profitability.

Merchandising Margins Expand 141 Basis Points

Overall, merchandise margin expanded 141 basis points, primarily driven by improved product cycles, fewer promotions and a favorable merchandising mix. The stronger merchandise margin drove an improvement in gross margin which increased 74 basis points to 30.28 percent. Partially offsetting improved merchandise margin were higher freight and shipping costs as well as modest deleverage and occupancy expense.

Said Stack, “While the retail landscape remains highly dynamic, we remain committed to driving profitable sales while making improvements across our business.”

SG&A expenses were reduced 128 basis points to 22.75 percent. The deleverage was driven predominantly by higher incentive compensation accruals and continued investments in growth initiatives to support the company’s long-term strategies.

Investments include the company’s first company-operated regional e-commerce fulfillment center expected to open in the Binghamton, NY, area in the third quarter. The center is expected to support one-business-day delivery in one of its most concentrated markets. A smaller regional e-commerce fulfillment center will open in Western region of the U.S. in late 2019.

Said Belitsky, “We expect these new fulfillment centers to reduce delivery time to our customers, allow us to scale quickly and be more efficient as we continue to grow our e-commerce business.”

The 12 percent e-commerce gain marked a slowdown from the first quarter, but that’s because the online business was brought in house a year ago. Online sales are up 31 percent on a two-year stock. Said Belitsky, “Additionally, we are very pleased with the current operating margin in e-commerce and its improving trajectory as we leverage fixed cost investments from the previous years.”

Lauren Hobart, president, said the company’s three strategic priorities remain improving the shopping experience, leveraging the retailer’s expertise around sports and improving productivity.

At the store level, Hobart noted that the retailer is providing clearer call-outs. She said, “With this elevated presentation, the athlete is drawn to these key items, making our stores easier to shop. We have been extremely pleased with how the athletes have responded, and the increased depth and elevated presentation of these strike points is resulting in strong double-digit sales growth on many of those key items.”

Among omnichannel objectives, Hobart noted that tests of BOPIS Lockers have been successful and expanded from three stores to ten. Curbside pickup is being tested at select stores.

In marketing, Dick’s is partnering with vendors, including recently with Nike on the “Play Like You Own It” campaign that received over 20 million views in its first week. Dick’s ScoreCard and Team Sports HQ data bases are being leveraged to customized marketing tailored to each customer’s preferred sports and interest. The retailer’s new Gold Tier for most-loyal shoppers is also being expanded.

Finally, expense control remains a key focus. She said, “Across the organization, we are laser-focused on lowering cost and eliminating unnecessary spending to reinvest in strategic growth initiatives. We’ve reduced expenses within our stores and other support centers by increasing efficiency through workforce productivity initiatives.”

Photo courtesy Dick’s Sporting Goods