Citing concerns about cannibalization as well as the ongoing shift towards online spending, Dick’s SG last week sharply lowered its planned store growth over the next three years and its overall fiscal 2017 revenue targets.
“We feel based on the evolving dynamics of retail sales we should be more prudent in our approach to brick-and-mortar expansion as we move forward,” said Ed Stack, chairman and CEO, at its 2015 analyst meeting.
Sales are now expected to hit between $8.7 billion and $9 billion in fiscal 2017, down from a previous goal of $10 billion set at an analyst meeting in September 2013.
It now plans to have between 735 and 750 Dick’s SG stores, 30 to 35 Field & Stream stores and 78 Golf Galaxy stores at the end of 2017. In late 2013, it projected it would have over 800 Dick’s SG, approximately 55 Field & Stream, and 86 Golf Galaxy locations by 2017’s close.
Field & Stream expansion is being particularly slowed because the company is testing Field & Stream stores right next to Dick’s SG locations. No openings are now planned for Golf Galaxy, which wasn’t so surprising given the sharp downfall in the golf business over the last year.
The biggest surprise was the slowdown at the flagship. Stack told analysts the new expansion plan emphasizes “minimal or no cannibalization” with existing Dick’s SG stores and that’s partly because of continued rapid growth in e-commerce.
“We just feel that it is time to be a bit prudent in where we're putting stores and how much we are going to cannibalize because this really is an evolving marketplace from an e-commerce standpoint and a lot of people feel that it's going to be 15 percent to 25 percent of the business,” said Stack. “We're kind of in that 20 percent to slightly plus 20 percent of the business and it's the right time to be prudent and let this thing play out a little bit before we end up with too many stores.”
Beyond store growth, the other notable change was that operating margin is now expected to rise by approximately 80 to 130 basis points to 9.0 percent to 9.5 percent in fiscal 2017, from non-GAAP operating margin of 8.2 percent in fiscal 2014, benefiting from both the expansion of gross margin and SG&A expense leverage. In September 2013, it had targeted an operating margin of 10.5 percent. The reduced expectation was attributed to online growing larger and still being slightly less profitable than its physical stores.
Other details of the updated 2017 forecast:
Sales are expected to grow at a 3-year compounded annual growth rate (CAGR) of approximately 8 percent to 10 percent from fiscal 2014 sales of $6.8 billion;
Consolidated comps are expected to climb 2 to 3 percent each year;
E-commerce sales are now expected to range between approximately $1.0 to 1.2 billion in fiscal 2017, up from $628 million in fiscal 2014. Officials had targeted approximately $1.1 billion in online sales in September 2013;
Diluted EPS is projected to grow at a 3-year CAGR of 12 percent to 16 percent through fiscal 2017;
Approximately $850 million in net capital expenditures are expected over the next three years, primarily in new stores, store remodels and e-commerce;
With its $1 billion 5-year share repurchase authorization, the company targets share repurchases of $100 to 200 million annually.
Officials also reiterated its first quarter and full year 2015 guidance.
Adjustments appeared somewhat expected given the challenges largely in golf and hunt categories that caused the company to downwardly revise growth targets at the start of 2014. Shares of DKS slid only 2.0 percent to $57.62 last Tuesday on the New York Stock Exchange after the news arrived.
Officials spent much of the meeting detailing the progress being made on recent growth initiatives.
Stack estimated that Dick’s SG currently has an estimated 10 percent market share in the U.S. sporting goods as the leading chain. It expects its share will increase 200 basis points by fiscal 2017.
The four growth drivers continue to be increasing productivity at existing stores, new stores, e-commerce, and specialty concepts.
On the merchandising side, the focus remains on key items and providing a differentiated mix.
DIFFERENTATION/KEY ITEMS MERCHANDISING FOCUS
Stack admitted that Dick SG’s assortment last year had become “a bit too broad which caused us to carry some unproductive inventory and caused unnecessary markdowns.” A SKU rationalization program in athletic apparel, team sports and footwear has been employed “to great success.”
Supporting differentiation, Stack said Dick’s SG is the leading retailer for the vast majority of brands it carries. Its 384 Nike shops, 294 UA shops and 90 North Face shops makes Dick’s SG “the destination for these brands.” He bragged that the range its stores can provide in just Nike apparel is “bigger than the entire store of some of our competitors.”
Expanding private label to over $1 billion over the next few years with labels such as Field & Stream, Umbro, Top Flite, Maxfli, Walter Hagan, Slazenger, Reebok Athletic Apparel, Adidas Baseball and Fitness Gear also supports differentiation efforts as well as margins. CALIA by Carrie Underwood women’s activewear brand “could be our number three athletic brand in the next few years,” with in-store shops planned, said Stack.
On the marketing front, newspaper continues to be reduced as a percent of its total spend as TV is increased along with direct to consumer, social and digital. The “Untouchable” campaign launched in 2012 has particularly resonated with teens and will evolve this year to “Who Will You Be?” Dick’s SG will also this year launch its first campaign exclusively targeting women.
Key partnerships with ESPN and the US Olympic Committee are a newer part of its marketing push. Beyond sponsorships around major college sporting events on TV, the ESPN collaboration has led to acclaimed documentaries. With the new US Olympic committee and Team USA partnership, Dick’s SG will be providing equipment to the “unsung heroes” whose Olympic quests aren’t being sponsored by the larger brands.
DICK’S PHYSICAL STORES SUPPORT OMNICHANNEL REVENUES
The Dick’s SG chain will open 45 to 55 new stores per year over the next three years, according to Andre Hawaux, EVP, COO and CFO. New store productivity remains healthy with 90 percent-plus productivity in a new store’s first full year on average and a 50 percent cash return on investment in the third year.
The stores, according to Hawaux, work as strong branding vehicles for Dick’s SG. Its stores collectively hosted over 7,500 events last year, including shop days for league partners as well as athlete appearances, clinics and Q&A sessions. They also provide equipment kits to over 75,000 teams annually to reach nearly 1 million athletes each year.
Hawaux particularly stressed how the physical stores work in concert with online by providing in-store pickup, ship-from-store, e-commerce returns and soon ship-to-store for bulkier items such as treadmills.
Dick’s SG estimates it has on average a mid-teens share in markets where it has a store presence with its most underpenetrated markets including bigger states such as California, Texas, Florida and New York. Hawaux further estimated Dick’s SG can gain an incremental $4 billion in omnichannel sales over time by opening stores in underpenetrated local markets and increasing its market share closer to its current local market average. He also offered several examples of cases where store openings significantly boosted local e-commerce sales. On average, 80 percent of its e-commerce sales are generated in the store's trade area.
Approximately 25 percent to 35 percent of its new stores will be in small markets, and Dick’s SG has identified 175 small markets for potential growth.
Nonetheless, Dick’s SG has no plans to shrink the size of its overall model. Stack noted that Dick’s SG still faces constraints fully supporting opportunities in women’s, kids, team apparel and its new CALIA collection and store productivity is “still running at plus 90 percent.”
Its reallocation of space away from golf and fitness to women’s and kids last year was given credit for its ability to deliver a 3.4 percent comp gain during the fourth quarter.
FURTHER E-COMMERCE INVESTMENTS PLANNED
Regarding e-commerce, Stack noted that online sales increased 30 percent to over $625 million in 2014 with the company just landing at number 70 on the 2015 Internet Retailer Top 500 list. It plans to build on that momentum in 2015 by launching a new platform for on-site search, improving capabilities in regionalization and customized pages to local markets, expanding assortments available for buy-online pick-up in-store, and working to capitalize on the shift toward mobile and tablet devices.
The company plans to have the Dick's SG e-commerce site on its own platform in January 2017. The move is expected to significantly enhance Dick’s SG control of the online experience, access to data and ability to develop content. EBay currently supports many of the back-office functions.
FIELD & STREAM COMBO STORE TEST
On its specialty concepts, Field & Stream has 11 stores currently with another eight planned this year. The expansion rate for the concept has slowed versus previous plans not due to performance but because the company is testing four combo stores of a Dick’s SG and Field & Stream this year. The side-by-side stores enable Field & Stream to focus on hunt, fish and camp while Dick’s SG optimizes higher-margin categories such as team sports, footwear, women's and kids.
Said Stack, “While we can't do as many of these combo stores as traditional Dick’s stores, we feel this will be a very compelling experience and therefore before we get too far down the road with Field & Stream we want to test this concept.”
Stack remains optimistic about the Field & Stream opportunity. He noted that the concept focuses on the $34 billion market for outdoor equipment including gear for hunting, fishing and camping, and the Dick’s SG’s stores weren’t “capturing what we saw as our fair share of the wallet within the lodge business.”
He added, “Our research and customer data suggests that the true outdoor enthusiasts expect a product offering comprised of top brands with depth and breadth of assortment that lets the customer know that you are truly authentic.”
With eight stores set for this year, five to eight Field & Stream openings are expected in 2016 and five to eight in 2017.
NO NEW STORES FOR GOLF GALAXY
Golf Galaxy isn’t expect to increase its store count but Stack still asserted the store helps Dick’s SG secure access to premium brands, gain insights into the golf enthusiast, gain scale with vendors, realize cost-efficiencies with Dick SG’s golf business, and support the game of golf when it rebounds.
He said golf “golf does go through some cyclical times” and was encouraged by a few recent events, including both PGA of America and Top Golf are doing to encourage participation as well as Jordan Speith’s thrilling win at the Masters.
“I don't think it is necessarily right around the corner but I think that there's some things being done in golf that are going to be very good for the game and we are going to stay in the golf business,” said Stack. “We are committed to the golf business and we think it will be fine.”
Asked about acquisitions, Stack said the company’s growth plan assumes none but management is open to them. Said Stack, “We look at some things that are presented to us, or we look at things that we can go out and are interested in. That's always a possibility but we don't have anything baked in the plan.”
COMPETITION LESS FIERCE
Asked if the competitive landscape has changed since 2013, Stack said the outdoor category, referring to Cabela’s and other aggressive moves in the hunt & fish space, “has clearly heated up a little bit,” which he attributed partly to Field & Stream’s entry as well.
“From a sporting goods standpoint, I think it has actually gotten a little bit less competitive,” added Stack. “We've got Academy, who is a very well run good operator that we compete with and then the other people in the sporting goods business I think from when we last talked in September of 2013 that they are less consequential today than they were then.”
