By Thomas J. Ryan
<span style="color: #a1a1a1;">Dick’s Sporting Goods reported earnings in the fourth-quarter that again topped Wall Street’s targets as same-store sales jumped 5.3 percent. But all the attention went to the retailer’s decision to remove the hunt category from another 440 stores.
On February 28, 2018, the retailer earned national headlines for its move to end sales of assault-style rifles—and destroying its stock of them—as well as banning the sale of guns to people younger than 21.
The decision was made in the wake of the school shooting in Parkland, FL that left 17 people dead. The gunman behind the shooting rampage at Marjory Stoneman Douglas High School had bought a gun at Dick’s in 2017, although it was not the gun, nor the kind of gun, used in the massacre.
The company in 2018 also tested the removal of the hunt category from 10 stores and extended that to another 175 stores in 2019. Now, the company plans to take an impairments charge of $35.7 million related to a trademark and store assets and a $13.1 million write-down of inventory to remove the hunt department from 440 additional Dick’s stores during the first half of 2020.
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On a conference call with analysts, Ed Stack, chairman and CEO, said the 135 Dick’s stores that the hunt category has been removed from generated positive comp sales in the fourth quarter, which he called “a noteworthy accomplishment during the peak hunting season.”
The move will leave the hunt category in only 12 percent of its doors.
The hunt category in those 135 stores was replaced with “categories and products that can drive growth and better align with the needs of each market.”
Stack said the retailer plans to build on 2019’s overall strong results delivered through its improving merchandising presentations across the store base, which included the successful rollout of premium full-serve footwear decks, as well as increased investments in apparel and baseball. For 2020, Stack said Dick’s plans to “re-conceptualize” its soccer and golf businesses, employing the same playbook that helped drive double-digit comp growth in the baseball category in 2019. Said Stack, “We’re optimistic that through more premium products, enhanced store experiences and exceptional service, we can better serve our soccer and golf athletes and drive stronger results in these categories.”
He said the “largest and most exciting initiative” for 2020 will be focused on the female athlete.
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Efforts to optimize inventory and floor space, deliver differentiated merchandising and drive consumer engagement across channels drove the 5.3 percent Q4 comp gain, ranking among the strongest comps among retailers this holiday season.
The retailer also managed to wrap up a comeback year in 2019 as overall same-store sales in 2019 improved 3.7 percent and healthy guidance was issued for 2020. The guidance assumes some supply chain disruptions from the coronavirus but doesn’t assume an impact from the outbreak on sales should the outbreak significantly spread in the U.S.
“It’s clear our strategies are working, our vendor relationships have never been stronger, and we have tremendous momentum with a great foundation to build on for the future,” said Stack on the call. “During 2019. we made meaningful changes across our business, fueling improved comp-store sales results. We elevated the experience in our stores through more differentiated and premium products. We improved in-stock positions and delivered stronger merchandise presentations. We also made our stores more experiential and reallocated for space to regionally relevant and growing categories. As we enter 2020, we remain enthusiastic about our business and are pleased with the start to the year.”
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Q4 Earnings Boosted By Merchandise Changes
In the quarter ended February 1, earnings on an adjusted basis improved 4.3 percent to $113.3 million, or $1.32 per share, from reported earnings of $102.6 million, or $1.07, a year ago. Results handily topped Wall Street’s average target of $1.22.
On a reported basis, earnings in the latest quarter came to $69.8 million, or 81 cents. Reported earnings included pre-tax hunt restructuring charges of $48.8 million.
Net sales for the quarter advanced 4.7 percent to $2.61 billion, topping Wall Street’s consensus estimate of $2.57 billion.
The comp gain of 5.3 percent compared to a 2.2 percent decrease in the year-ago quarter, which was adjusted for the calendar shift due to the 53rd week in 2018. The comp gains were driven by growth across each of its three primary categories of team sports, apparel and footwear. The removal of hunt from 125 stores contributed to a “meaningful sales decline” in the hunt category.
The company saw a 2.4 percent increase in average ticket and a 2.9 percent increase in transactions, benefiting from its merchandising initiatives and improved in-stock positions. Dick’s increased investments in inventory in 2019 after finding it missed sales opportunities in the prior-year due to overly-conservative stock levels.
Stores delivered its third consecutive quarter of positive comp gains. E-commerce sales for the quarter increased 15 percent, expanding to 25 percent of sales in the quarter, compared to 23 percent a year ago.
Lee Belitsky, CFO, noted that the healthy comp gains came despite the compressed holiday selling season that included seven fewer days between Thanksgiving and Christmas as well as mild weather than negatively impacted sales in cold-weather categories.
On a non-GAAP basis, gross margins improved 73 basis points to 28.6 percent. The improvement was driven by leverage on occupancy costs of 62 basis points and merchandise margin rate expansion of 14 basis points. As expected, this was partially offset by costs associated with the opening of two new dedicated e-commerce fulfillment centers.
Non-GAAP SG&A expenses were 22.93 percent of net sales, an increase of 77 basis points year-over-year. Thirty-six basis points of the increase were attributable to expense recognition associated with a change in the value of its deferred compensation plans, resulting from the increase in overall equity markets during the fourth quarter. That expense was fully offset in other income.
The balance of the deleverage was primarily due to higher marketing expenses related to its successful multi-channel holiday campaign, as well as higher incentive compensation expenses, due to strong fourth-quarter results.
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Elevated Service Levels, Omnichannel Investments and Women’s Push Set For 2020
Lauren Hobart, president, said the beyond the merchandising changes and inventory investments, the fourth-quarter success “is a direct reflection of our focus on improving service experience, and marketing across all channels.”
Around the same time the prior year, Dick’s introduced new service standards across its store team and those investments paid off. Hobart said, “This past year, our store teammates demonstrated that focusing on serving our athletes has a meaningful impact on sales.”
Those efforts to improve its “service and selling culture” will be amplified further in 2020.
She also stores contributed “tremendously” to e-commerce growth through buy-online, pick-up in-store (BOPIS) and ship from store. During the fourth quarter, strong BOPIS growth continued to be seen at Dick’s locations. BOPIS was also expanded to each of its Golf Galaxy locations to a strong initial response. Overall, BOPIS for the year grew at twice the rate of the 16 percent sales growth seen in the overall e-commerce business.
Hobart noted that the two new fulfillment centers, along with its new strategic delivery partnership with FedEx, helped reduced delivery times for online orders to customers. Looking ahead, the focus will continue to be on faster and more reliable delivery, as well as improved functionality and performance of its website. This includes providing shorter and more accurate estimated delivery dates, expanding BOPIS to more items and delivering more localized website experiences, as well as a faster and more convenient checkout.
On merchandising, Dick’s will be expanding women’s assortments across several key sports, including basketball, dance, soccer and softball, as part of a multifaceted women’s initiative to position Dick’s as the “destination for her.” The women’s push was heralded by the launch last week of a women’s-specific campaign showcasing the “surprising history” of the sports bra and featuring Brandi Chastain.
The current year will also mark by a celebration of the five-year anniversary of the launch of Calia, which has grown into Dick’s second-largest women’s athletic apparel brand behind Nike. Said Hobart, “This year we’re excited to elevate the Calia brand and assortment to new categories, more premium product, a refreshed store experience and stronger marketing.”
Calia is integral to Dick’s broader private brand strategy and collectively its private brands represent the retailer’s second-largest brands behind only Nike and drive differentiation and exclusivity within assortments. Hobart also said the retailer remains “very enthusiastic” about DSG, which was launched last year. DSG is expected to surpass Field & Stream to become Dick’s largest private brand by the end of the year.
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Full-Year Comps Ahead 3.7 Percent
For the full-year, earnings on a non-GAAP, adjusted basis reached $329.1 million, or $3.69 a share, against reported earnings of $319.9 million, or $3.24, representing a gain of 2.9 percent.
Results exceeded the high-end of company guidance calling for earnings in the range of $3.50 to $3.60.
Adjusted earnings in the latest period exclude hunt restructuring charges, a gain on the sale of subsidiaries, non-cash asset impairments and the favorable settlement of a litigation contingency. On a reported basis, earnings in the latest year were $297.5 million, or $3.34.
Sales in 2019 increased 3.7 percent to $8.75 billion. Consolidated same-store sales also increased 3.7 percent. Results topped comp guidance calling for a gain in the range of 2.5 to 3 percent. Consolidated same-store sales decreased 3.1 percent in 2018, adjusted for the calendar shift.
Total inventory increased 21 percent at the end of the fourth quarter. The planned increase was due primarily to strategic investments to support key growth categories.
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Flat To Two Percent Comp Growth Seen For 2020
For 2020, EPS is expected in the range of $3.60 to 4.00, representing a range between a decline of 2.4 percent and a gain of 8.4 percent. Same-store sales are expected to be flat to an increase of 2 percent, compared to the 3.7 percent increase in 2019. The low-end of the company’s outlook includes some caution related to supply chain disruption potentially impacting its results beginning in the second quarter. No impact from the coronavirus is expected in the first quarter.
The company expects to open nine new Dick’s stores and six Golf Galaxy stores in 2020. The company also expects to relocate 14 Dick’s and three Golf Galaxy stores. As of February 1, the company operated 726 Dick’s Sporting Goods, 94 Golf Galaxy, and 27 Field & Stream stores.
Photo courtesy Dicks Sporting Goods
