Dick’s Sporting Goods reported earnings declined in the fourth quarter but results arrived at the upper end of guidance. More importantly, Dick’s officials provided guidance for the current year that were well ahead of Wall Street’s targets as innovation from several brands is expected to result in less margin pressure in 2018 than previously anticipated.
Shares of Dick’s closed Tuesday at $32.88, up 32 cents.
In the quarter ended February 3:
- Sales for the 14-week fourth quarter of 2017 increased 7.3 percent compared to the 13-week quarter last year.
- Consolidated same-store sales decreased 2.0 percent on a 13-week to 13-week basis compared to the company’s guidance of a low single-digit decrease. Fourth quarter 2016 consolidated same-store sales increased 5.0 percent.
- Reported net income reached $116.0 million, or $1.11 per share, at the upper end of guidance provided on November 14 calling for earnings in the range of $1.05 to 1.17. The extra week contributed 9 cents a share to earnings. In the year-ago fourth quarter, earnings were $90.2 million, or 81 cents per share. Both periods were impacted by special items.
- On an adjusted basis, earnings sunk 13.9 percent to $127.3 million, or $1.22 per share, from $147.8 million, or $1.32 a year ago, but at the upper end of its guidance calling for $1.12 to 1.24 per share. The latest year excludes transition costs related to ScoreCard loyalty program enhancements and a litigation contingency. The prior year excludes inventory write-downs related to its move to narrow its vendor base, asset impairments and store closing charges, as well as costs to convert former Sports Authority and Golfsmith stores.
“We’re very pleased to deliver results within our guidance range,” said Ed Stack, chairman and CEO, on a conference call with analysts.
The comp decrease was driven by 2 percent decline in ticket due to the promotional environment while transactions were flat, which was improvement compared to prior quarter.
E-commerce business increased approximately 9 percent but were less than planned due to transitional issues resulting from a platform update. As a percent of sales, e-commerce increased from 17.9 percent to 19 percent.
As previously guided, gross margins declined year-over-year but were less than had anticipated on its November call.
On a non-GAAP basis, gross margins reached 29.6 percent, which was down 130 basis points versus last year. This decline was driven by lower merchandise margins in a promotional marketplace. Higher shipping and fulfillment costs as a percentage of sales were also seen as online sales expanded.
Non- GAAP SG&A expenses were $590.3 million, or 22.2 percent of sales, representing a deleveraging of 69 basis points from the same period last year. This deleverage was primarily driven by higher store payroll expenses due to investments in labor during peak holiday hours, as well as approximately $18 million of asset impairment charges.
Among categories, its Team Sports, Footwear and Outdoor Equipment business all comped positively, according to Stack. Strong comp growth was also seen in its private brands, which significantly outpaced the company average, posting strong double-digit comp sales gains and improved margin rates.
As expected, these areas of strength were offset by weakness in its Hunt and Electronic categories, while its Apparel business comped approximately flat. Within Apparel, strong sales growth came from Adidas, Calia and Patagonia, which was offset by “significant weakness in the Under Armour brand, as expanded distribution and a highly promotional environment impacted it sales,” said Stack.
Stack said that for 2018, Dick’s plans to allocate more premium space to its own brands inside its locations, as well as other brands that are performing well, and supports its differentiation efforts. He added, “With a stronger innovation pipeline from Nike, Adidas, Callaway and Taylormade and our own private brands, we now expect margin rates will be impacted less than previously anticipated.”
Elaborating on the categories, Lee Belitsky, its CFO, said footwear continued to comp positive, low single-digits after fully anniversarying its premium full-service footwear department expansion. Added Belitsky, “Excluding the impact from Under Armour’s broadened distribution, we were pleased with our Apparel business, which benefited from a strong merchandising strategy and favorable weather. Team Sports and Outdoor Equipment also posted healthy comp sales gains.”
Hunting comped negative high single-digits “indicative of weak overall industry demand, which does affect competitors and suppliers alike.” Belitsky pointed to Gander Mountain’s bankruptcy filing last year, Remington Outdoor’s plan to reorganize in bankruptcy proceedings announced earlier this year, and steep sales and earnings declines being reported by major firearms suppliers. Added Belitsky, “While we saw comp sequentially improve from third quarter as we capture displaced market share from the Gander Mountain closings and anniversary the 2016 presidential election, the improvement was not as much as we have expected. We expect the hunting headwind to continue throughout 2018 and will likely be more impactful as a result of our recently announced changes in our firearms policies.”
Electronics, which is primarily fitness trackers, continues to see significant double-digit negative comps “as the industry sector is in significant decline.” Dick’s plans to “meaningfully” reduce its exposure to the category in 2018. Finally, the anniversary of the Chicago Cubs 2016 World Series Championship was a significant headwind to its comp sales during the fourth quarter, particularly because the vast majority of Houston Astros sales who won this year were not included in its comp base. Belitsky added the “the balance of our license business was quite strong.”
Lauren Hobart, president, outlined a number of stepped-up investments being made to improve the positioning of the business.
In the fourth quarter, Dick’s increased its investment in payroll “to ensure our stores were stocked to deliver improved customer service, particularly during peak holiday hours.” The ScoreCard loyalty program was enhanced to remove expiring points at the close of each year and new ways are being tested to reward members.
In e-commerce, Dick’s scored a “record setting” Cyber Monday but also faced “some intermittent performance issues” on its website during the quarter as a result of a move to a new web platform. As a result, the 9 percent online growth in the quarter was below expectations. Said Hobart, “We have mitigated many of these issues and we’ve seen our e-commerce growth accelerate in the first quarter. In 2018, we will elevate the online customers experience by improving the design and functionality of product pages, streamlining the checkout process and implementing more personalization.”
Stack described investments in technology as “critical” to improving the online experience for consumers. Said the CEO, “We will also make investments in our fulfillment system and networks to shorten the delivery window for our online orders. Additionally, we remain focused on driving differentiation and exclusivity within our assortment, particularly in our private brands.”
Stack said Dick’s expects its own brand growth again to outpace the company average in 2018 and reiterated that the overall private brand business can reach $2 billion “over a relatively short period of time.”
He added, “During ’18, we will accelerate in our private brand area, investments in talent, as well as marketing, design and technology capabilities to drive growth in our key brands, such as Calia, Field & Stream, Top-Flite, Walter Hagen and Fitness Gear. We’ll also launch a couple of new brands this year.”
In delivery, the focus will be on increasing its speed to customers and exploring new shipping and fulfillment methods. Stack said investments in the supply chain will focus on increasing “in-stock levels, down to the size color level, improve the speed of delivery to our customers. We expect these investments will improve customer satisfaction, inventory turnover and merchandise margin rates.”
In marketing, the focus will be deepening “the emotional connection that we have with our customers through our shared passion for sports,” said Hobart. That’s signified by the launch during the Winter Olympics of its Unity campaign that called out the power of sports to unite people.
Other priorities, including driving traffic to its brick-and-mortar stores and online site, leveraging its ScoreCard database with more targeted offers to customers, continuing its recent focus on digital channels to engage consumers and expanding Team Sports HQ.
Said Stack, “As the industry leader, we are making these investments from a position of strength and continue to believe we will be the clear winner in our sector. We will achieve this by striving to flawlessly execute the basics, while focusing on elevating the consumer experience. I’d like to thank our associates across the company for the hard work and commitment they showed to deliver the fourth quarter results and for their upcoming efforts in 2018.”
For 2018, guidance calls for:
- Net earnings are expected in the range of $2.80 to 3.00, about flat to down 7 percent compared to earnings of $3.01 reported on both a reported and pro-forma basis.
- As a result of the Tax Act, the company’s EPS guidance assumes an effective tax rate of approximately 26 percent.
- Consolidated same store sales are currently expected to be in the range of approximately flat to a low single-digit decline on a 52-week to 52-week comparative basis, compared to a 0.3 percent decrease in 2017.
- Approximately 19 new Dick’s Sporting Goods stores are expected to open and four will be relocated in 2018. Eight of the new stores are expected to open during the first quarter. The company does not expect to open any new Field & Stream or Golf Galaxy stores in 2018.
Asked about the conservative comp outlook for the current year calling for a flat to a low single-digit decline, Stack said part of that reflects its new firearms policy that he believes is “not going to be positive from a traffic standpoint and a sales standpoint.”
He added when probed further by another analyst, “Some of those customers that buy firearms buy other things also. And we’ve had some pushback and we knew that that was going to happen and we try to have that in our guidance that there’s going to be the people who just don’t shop us anymore for anything.”
More encouraging, Stack said, “We were actually surprised the outpouring of support that we received from this. It hasn’t been long; it’s only been two weeks. And we’ve seen a bit of a difference in the hunt business, not an awful lot, but it’s too early to tell how this is going to be impacted.”
Stack also said the conservative guidance reflects a belief that there’s “going to still be pressure with Under Armour.”
He reiterated that many of its private brands, primarily driven by Field & Stream and Calia, will secure more space in stores this year to replace “some of the brands that are not performing as well.” He also noted Dick’s is a license for Reebok in fitness apparel and that Walter Hagen and Slazenger have done “extremely well” in golf.
He called out Nike and Adidas as the two top-performing national brands. Said Stack, “The innovation pipeline that Nike has, we’re really very enthusiastic about that. We’re enthusiastic about what’s going on with Adidas also.”
Stack nonetheless was optimistic that Under Armour would recover. He stated, “I think Under Armour is going to come back. I think Kevin and his team are really focused on fixing the business. And I think they probably talked to you about that they have to work on their segmentation policy, which I think they’ve talked about. The broader distribution I think definitely had an impact and I think it’s going to continue to have an impact until segmentation is done. But those are things you should talk to Kevin and the Under Armour team about.”
Stack also agreed with the sentiment that the industry’s overall inventory levels are in better shape. Stack said, “I think we’re pretty close. I think it’s pretty cleaned up. I would say the hunt category has probably got some inventory in the pipeline. But the balance of our business, we feel that not only our inventories are in good shape but we think the industry’s inventory is in pretty good shape.”
Asked if Dick’s would benefit from the Philadelphia Eagle’s Super Bowl win, he said, “We’re not going to get to that level of detail. But the Eagles were good for us …We were very happy with our license business and we’ll see what happens in the play-offs going forward.”
Photo courtesy Dick’s Sporting Goods