Dick's Sporting Goods, Inc. saw its shares get hammered last week as Wall Street reacted quickly to word from DKS management that the economy is expected to have an impact on a business that many thought was a bit insulated from the economic downturn.  DKS shares fell 22.8% for the week to close at $22.49 on Friday. 

 

The impact of the lowered expectations for the year was felt far beyond the retailer’s own stock as one analyst moved to downgrade Under Armour on concerns over a weakening sporting goods sector.  What the analyst failed to understand was that Dick’s cited issues with fishing, camping, golf hardgoods and other high ticket items — not apparel and footwear.


To the contrary, Dick’s Sporting Goods did quite well with the recent launch of the Under Armour performance trainers, with DKS Chairman and CEO Ed Stack suggesting they had more success with the launch than any other retailer.  According to data compiled by industry research and media firm The SportsOneSource Group, which publishes this newsletter, the industry liquidated roughly a third of the first wave of shipments of the Under Armour product in the first two weeks.  SOS estimates that DKS liquidated roughly half of their initial allocation.


Dick’s Sporting Goods comp store sales results came in at the low end of expectations, declining by 3.8% for the retail first quarter, while Golf Galaxy stores pro forma sales declined 7.4% for the period.  Weather played a part in the shortfall for the quarter, but Mr. Stack pointed to other macro issues such as gas and food prices, along with the general concern about the future, as having a more lasting effect on the DKS consumer.


The comp sales decline at the Dick’s stores was driven by fewer transactions, partially offset by higher sales per transaction.   DKS said cannibalization impacted comps by approximately 1%, similar to recent levels.  Traffic was said to be down about 4.5% in the first quarter, but the average ticket was up 70 basis points.


In addition to the UA crosstraining launch, DKS also said the launch of the adidas baseball equipment program was “very, very successful” as well.  They also called out exclusive products such as the David Ortiz baseball shoe from Reebok and the A-Rod cleat from Nike as “very successful” products.  

 

Stack said they were “still pleased” with what is going on with Crocs and did “very well” with the brand in the first quarter, “especially around the Mammoth shoe.”  Still, he said they will continue forward with the Croc shops they have, but won’t be “investing heavily in many new ones.”  

 

“We are still selling an awful lot of shoes,” quipped Mr. Stack.  The Nike business is strong enough that the retailer is pulling forward Nike footwear orders and is attempting to do the same with apparel.  At the same time they are also pusing back — or outright canceling — orders from other brands. 

 

The kids footwear business was said to have been “particularly difficult” as the retailer struggled to anniversary stronger sales of Heelys footwear last year.   They described the Heelys business as “basically done.”  Backing out the Heelys business, Dick’s would have seen comps decline roughly 3.0% for the period.


The fitness business was described as “doing much better” and some areas in the hunting business with higher priced firearms are “doing quite well.”  Basketball systems were said to be soft and the golf business was described as “particularly weak” due to a lack of any real new product launches this spring after very successful launches of the square head drivers last year.  However, while there has been softness in some high ticket categories such as the driver category, the iron category has performed better. 


Tennis was also said to be soft as the weekend warrior puts off discretionary purchases.  The fishing tackle business was seen as “very difficult” due primarily to heavier rainfall that has caused rivers and streams to swell.


DKS will convert the first of the Chick’s Sporting Goods in SoCal to Dick’s this fall so they can assess through Holiday and next spring.  They will keep the ski and snowboard business intact and plan to use a different formula that will see hunting replaced by the beach brands that make the Chick’s stores so strong in SoCal.


Due to the concerns over macroeconomic conditions, DKS is revising its 2008 guidance to reflect diluted EPS in the range of approximately $1.22 to $1.36, compared to $1.33 per share last year and previous guidance in the range of $1.49 to $1.54 per diluted share.  Comp store sales are now expected to decrease approximately 3% to 5% for the full year, versus previous forecasts that called for comps to be flat to up 1% for the year.


For the second quarter, the retailer now expects to earn approximately 34 cents to 38 cents per diluted share versus 41 cents per diluted share in the year-ago period.  Comps are expected to decline between 4% and 7% in the second quarter.


>>> SoCal success will take more than removing guns in favor of boards and sportswear