Shares of Dick’s Sporting Goods Inc. (NYSE:DKS) fell more than 10 percent Tuesday after the company sharply cut its guidance for earnings and same-store sales for the full year largely due to the impact of warm weather so far this fall.
The new outlook assumes a decline between 3 to 15 percent in the fourth quarter earnings per share.
“We're off to a slow start as the continuation of unseasonably warm weather across a majority of our markets is putting pressure on sales and traffic,” said Ed Stack, chairman and CEO, on a conference call with analysts about the fourth quarter. “This is obviously affecting our inventory levels which are higher than we planned.”
Total inventory was up 13.1 percent at the end of the quarter. Stack said the company is working with its vendors to reduce its exposure to slow-selling merchandise by returning product, canceling orders and securing markdown allowances.
For the third quarter, excluding a litigation
settlement charge in the latest year, net income rose 4.1 percent to $51.9 million, or 45 cents a share. Results came in
at the low end of its guidance of 45 to 48 cents per share provided on
Aug. 18. After the charge, reported earnings were $47.2 million, or 41
cents per share, down from $49.2 million, or 42 cents, during same period a year ago.
Total third-quarter sales – including both Dick's and its Golf Galaxy locations – increased 7.6 percent to $1.64 billion, but same-store sales for the group only inched up 0.4 percent. Comps arrived below its previous guidance calling for gains in the range of 1 to 3 percent. Same-store sales for the Dick's chain inched up 0.7 percent in the
latest quarter, driven by a 1.2 percent increase in sales per
transaction and a 0.5 decrease in traffic. Golf Galaxy’s comps decreased
2.9 percent.
“Our merchants did a great job selecting key items, refining our product assortments, overall we were very pleased with our performance across the important categories such as athletic apparel, athletic footwear, and accessories,” Stack said. “At the conclusion of back-to-school, our comps were running at the higher end of our guidance. However as the quarter progressed, record warm weather across a majority of our markets negatively impacted sales and traffic. This impact was notable in the critical cold weather categories.”
The outdoor category comped relatively flat in the quarter as strength in lifestyle camping, paddle sports and sport games was offset by a decline in hunting. The hunt business is now expected to remain under pressure in the fourth quarter based on recent trends and an anticipated promotional environment.
On the brighter side, Stack said golf “continued to show meaningful improvement,” with golf margins expanding over 200 basis points and both golf apparel and equipment comping positive on a consolidated basis.
Athletic apparel and footwear delivered solid comp gains for the quarter. Stack credited investments by key vendors like Nike, Under Armour, The North Face and Adidas around the in-store shopping experience. Six Brand Jordan shops were opened during the third quarter and an additional four will open in the fourth quarter.
Other solid performances came from the hard lines side of the team sports area as well as the fan apparel business.
Stack also noted that Dick’s has partnered with Nike to develop a new full-service footwear deck at a store in Las Vegas and another in Los Angeles. Stack said the Nike footwear shops have only been open a few weeks “but it looks very good and we like the way the Nike product is displayed and is selling. And we think that the other brands and the way that we focused on the other brands away from Nike looks very good also. So we're pretty pleased with this and I suspect that we'll do several more of these.”
Stack also said the Nike footwear shop, which is being staffed by Dick’s employees, is part of overall plan to move to more of a full-service footwear model. Added Stack, “We think that as we've tested it, the customers responded very well to us. We like the assortment. We'll be able to offer a broader assortment of product with this presentation and we're moving in that direction at a pretty rapid pace.”
Stack also said Dick’s is working with Under Armour to create a Next Generation shop concept that will roll out next year. The chain also is working with new partners such as Polo Ralph Lauren with 75 Polo in-store shops set to open this year.
Stack said investments in its private brand portfolio “continues to pay off.” Calia, the fitness apparel line developed with singer Carrie Underwood, is expected to become the chain’s number three women's athletic apparel brand by the end of 2016, he noted.
E-commerce penetration grew to 8 percent of net sales in the quarter compared to 7.3 percent in the third quarter of 2014, reflecting growth rate of 18 percent.
“We continue to move forward with our e-commerce independence to capitalize on the significantly improved economics and other strategic benefits including the control to create a differentiated online experience, easier access to data and the ability to leverage cross channel data, control over development cycles including faster testing times and implementation and the ability to quickly stand up new sites,” Stack said.
The company launched its first ever Field & Stream e-commerce website, representing the second site it operates in-house along with a site for Golf Galaxy. Andre Hawaux, the company’s COO, said that in addition to additional sales opportunities, the company is gaining experience from having two sites on a single platform. The transition of Dick’s website to a proprietary site is still scheduled to be completed by January 2017.
Dick’s also recently enhanced its mobile application to reward customers for their active lifestyles through a link to fitness tracking applications such as Under Armour's Map My Run app and Fitbit. Said Hawaux, “This aligns with our brand belief that sports matter and we hope this encourages our customers to be active and continue playing sports.”
Dick’s opened 27 new Dick's SG stores, relocated five Dick's SG stores, and remodeled two Dick's SG stores in the quarter. New store productivity reached 97.4 percent. Hawaux said Dick SG’s new stores continues to generate an approximate 50 percent cash-on-cash return on average in year three while its relocations and remodels generally provide a respective 15 percent and 5 percent sales lift in their first full year. Seven new Field & Stream stores also opened in the quarter.
Gross margins in the quarter improved 13 basis points to 29.73 percent, primarily driven by merchandise margin expansion, partially offset by occupancy and increased shipping expense as a percentage of sales due to the growth in e-commerce. Excluding litigation settlement costs, SG&A expenses increased 14 basis points to 23.57 percent, primarily due to increased store payroll due to further investments in hours to enhance the shopping experience.
For the current year, non-GAAP EPS is now expected in the range of $2.85 to 3.00, excluding the litigation settlement charge, down from previous guidance of $3.13 to 3.21 a share. In the year-ago period, non-GAAP EPS reached $2.87, excluding a gain on the sale of an asset and golf restructuring charges. Reported earnings were $2.84 in 2014. EPS is based on 117 million diluted shares outstanding versus 121 million a year ago.
The company now expects consolidated same-store sales to be approximately flat to an increase of 1 percent. Under its former guidance, same-store sales were projected to rise between 1 and 3 percent. Same-store sales grew 2.4 percent in 2014.
For the fourth quarter, EPS is expected to come in the range of $1.10 to $1.25, down from $1.30 in the same quarter last year. EPS is based on 115 million diluted shares outstanding in the period versus 120 million a year ago.
Consolidated comps for the quarter are currently expected to be in the range of negative 2 percent to positive 1 percent, as compared to a 3.4 percent increase in the fourth quarter of 2014.
In the Q&A session, Stack said the pressure on cold-weather categories in the latter part of the quarter and so far in the fourth ranged beyond outerwear to categories like fleece and compression apparel used for football and soccer players. The hunting boot category was also impacted. Stack added that it doesn’t look like the weather will “get meaningfully colder” through the month of November but he’s optimistic the weather may turn colder to boost December. Said Stack, “We've got the inventory and the right product in some markets where it has gotten a little bit colder and we've had some snow, and the consumer has responded that our content is right, the assortment is right and we're optimistic so it could get much better if we do get that colder weather.”
He also said while much of the recent weakness in hunt was weather related, the overall category remains under pressure. Added Stack, “I think there's still an overhang from the build up of purchasing that was done over the last couple of years, especially in the gun category and we think that it's still hasn't normalized and it's going to continue to be under pressure.
Regarding golf, Stack said he remains “cautiously optimistic” about the category, which is being aided by strong response to the new M1 driver from TaylorMade and new Big Bertha from Callaway as well as strong assortments from Footjoy on the footwear side. While not viewing golf as a “big growth area” for the company, the category has become notably more profitable than a year ago. Added Stack, “We think we've stopped the bleeding so to speak but it will be much more profitable.”
Stack discounted that the recent weakness could be traced to department stores such as Kohl’s more actively pursuing the activewear category. Said Stack, “We're not seeing pressure from an athletic apparel standpoint around the true athletic apparel.”
He added the Dick’s chain is also seeing a “very good” performance form its fitness apparel, or athleisure, offerings and he also believes Dick’s is greatly differentiated in the category.
Said Stack, “If you take a look at what Kohl's has versus us with the shops that we have the environment, the broader selection of product, the key color-ups, the exclusive colors, the hook ups with footwear it's a very different shopping environment at our store than it is at Kohl's or even the department stores. So we're not seeing that as an issue right now.”
Stack also stressed that the company had no plans to slow its expansion plans with either the Dick’s chain or Field & Stream as well as its numerous investments in e-commerce and other omni-channel initiatives. He said the weakness is “weather related and we've got the data that backs that up,” pointing to the strength in non cold-weather related product.
He said the markdown pressures are being felt industry side, asserting “some of the other retailers that have had some difficult times or maybe having a more difficult time than us are going to have to take markdowns.” Indeed, he cited the liquidation of City Sports as well as slow down in expansion and store closings by others as a sign that Dick’s is performing well competitively.
“Others are closing stores and we don't have to do that,” said Stack. “We're in really a very good shape. Our new stores are performing extremely well and we're very well positioned to take advantage of this displaced market share once some of these people are closing stores.”
