Shares of Dick’s Sporting Goods plunged 13.7 percent Tuesday after the sporting goods giant reported same-store sales that came in well below guidance while announcing it was taking further actions, including the layoff of 160 jobs, to reduce its expense structure.
On a conference call with analysts, Ed Stack, chairman and CEO, also indicated that Dick’s would be “significantly” slowing its expansion efforts in part due the expectations of lower rents arriving in the years ahead. Said Stack, “In 2017 we expect to open approximately 43 Dick stores of which 19 are former TSA stores. In 2018 we expect to open between 15 to 20 stores most of these leases are already signed and in 2019 it can be as few as 5 to 10.”
The layoffs of 160 employees is due to the elimination of positions primarily at its store support center. For the second quarter, the company plans to record a pre-tax charge of approximately $7 million for severance and other employee-related costs associated layoffs.
For the full year, Dick’s lowered its expectation for same-store sales due to the lower-than-expected sales in the first quarter, some pressure due to the liquidations at Gander Mountain and the impact of broader-than-expected distribution of athletic apparel in the marketplace. Its outlook for net earnings was reduced due to the second-quarter charge but its guidance for non-GAPP earnings, which excludes non-recurring charges, was maintained.
Shares on Tuesday fell $6.53 to $41.03 in trading on the New York Stock Exchange, marking the stock’s biggest one-day decline in three years.
For the first quarter ended April 29, consolidated same-store sales increased 2.4 percent, compared to the company’s guidance of an approximate 3 to 4 percent increase. The comp increase was driven by a 1.6 percent increase in ticket and a 0.8 percent increase in transactions. E-commerce climbed 11 percent.
First-quarter 2016 consolidated same store sales increased 0.5 percent. Net sales increased 9.9 percent in the latest quarter to $1.83 billion.
Net earnings inched up 2.3 percent to $58.2 million, or 52 cents per share, reaching the high-end of management’s guidance calling for earnings in the range of 48 to 53 cents.
On a non-GAAP basis, net income improved 3.6 percent to $60.3 million, or 54 cents, exceeding guidance in the range of 50 to 55 cents per share. Non-GAAP results exclude $3.5 million of pretax Sports Authority conversion costs incurred to convert former Sports Authority stores. Results were in line with Wall Street’s consensus estimate of 54 cents.
Gross margins eroded 17 basis points to 29.69 percent. Merchandise margins expanded 13 basis points. However, this improvement was more than offset by higher shipping and fulfillment costs as a percentage of sales.
SG&A expenses were 24.07 percent of sales, deleveraging six basis points for the same period last year, primarily driven by higher store payroll expenses associated with its premium full service footwear decks.
Among the highlights of the quarter was the successful relaunch of Dicks.com on a proprietary web platform on January 29. Stack said the company experienced “a couple of bumps in the road” early on that were quickly fixed. The company initially backed off on online marketing due to possible problems but eventually ramped up marketing and conversion continued to improve throughout the quarter with April running up 20 percent. Said Stack, “We’re pretty confident we’ll be fine from an e-commerce standpoint.”
Regarding sales, Stack said the retailer’s April business picked up, rising 5 percent on a comp basis. But he noted that a number of other retailers had noted that the quarter “got off to a slow start.” He wasn’t sure if delays in tax refunds caused the slow start but he believes weather impacted March results with some baseball leagues starting later, golf courses interrupted by snow and cold weather and fishing also feeling the impact of a cold early spring. Said Stack, “February wasn’t bad, March was not quite as good, and April came back really very nicely.”
Among categories, hard-lines, apparel and footwear all saw growth. The golf and footwear business “remains strong,” while outdoor, which includes hunt & fish, and electronics comped negatively.
The retailer’s private brands “continue to gain traction,” led by its Calia line of women’s athletic apparel line done in partnership with Carrie Underwood. Expanded assortments and increased square footage are being planned for Calia in 2018.
“The Calia brand in particular has been terrific,” said Stack. “Carrie has been a great partner, and we see that business continuing to accelerate, and we’ll expect it to continue to do that.”
Among newer brands, Second Skin, an athletic brand, was launched in the quarter and “our hope is that we can move that to be as successful as the Calia brand,” said Stack. Dick’s also launched a second private-label brand, Ethos, a higher-end exercise brand of weights, kettlebells, benches and accessories that the retailer is also “pretty excited about.”
Dick’s other private brands include DBX, Field & Stream, Fitness Gear, Lady Hagen, MAXFLI, Nishiki, Primed, Quest, Top-Flite and Walter Hagen, as well as brands exclusively licensed from third parties including Adidas baseball, Reebok (performance apparel), Slazenger (golf and racquets) and Umbro (performance soccer equipment, footwear and apparel). Said Stack, “We have seen ongoing growth in our other brands as well and continue to expect our private brand portfolio to contribute approximately $1 billion in revenue this year.”
Stack said Dick’s continues to gain share due to the exits of Sports Authority and Golfsmith. Additional share gains are expected from the scheduled liquidation of Gander Mountain’s 160 stores by the end of August. He noted that that while Camping World, which acquired the lease rights to Gander Mountain’s locations in bankruptcy proceedings, has said it plans to re-open about half of locations, the reduction in net stores is expected to result in opportunities to gain market share.
However, Stack said the going-out-of-business sales “could have negative impact on our sales through the third quarter as customers stock up on discounted firearms, ammunition and other hunting and fishing products.”
In the Q&A session, Stack noted that the impact from liquidations at Sports Authority wasn’t as bad as expected because Sports Authority “didn’t really have a lot of the inventory that people were looking for going into the third quarter.” But he said there’s “no fashion component” to the firearms, ammunition and hunting accessories that Gander Mountain specializes in. Added Stack, “So I think it’s going to have a bit of an impact on our business in the second quarter and the third quarter.”
Lee Belitsky, the retailer’s CFO, initially indicated that broader distribution of athletic apparel from “a key vendor partner” would be in part responsible for the lower comp guidance for the year, implying that Under Armour’s widely-publicized launch at Kohl’s was the culprit. But in the Q&A session, Stack declined to get into specifics other than to say the company has “seen some broader distribution in the athletic apparel business that we hadn’t anticipated when we first did our plan.” He added, “The market is just so big and as the market gets diluted across retails, it’s going to have an impact.”
Stack said Dick’s continues to invest to drive sales and increase profitability across digital channels. As part of that, “significant investments” are being made in its Team Sports HQ business and data-driven customer engagement platform as part of a multiyear initiative. Said Stack, “Similar to how we grow our e-commerce business to nearly $1 billion, we believe there is a tremendous opportunity with Dicks Team Sports HQ platform with nearly 30 million participants in Team Sports at the high school level or below, we expect these investments to drive both digital and store sales resulting in profitable growth over time.”
Regarding expansion, Stack noted that despite plans to reduce new store openings in the year ahead, new store productivity remains healthy, in excess of 90 percent.
“We are slowing our growth as we see more and more real estate coming with other retailers closing stores,” said Stack. “We are starting to see prices come down and we believe this trend will only accelerate in all true A malls.”
He also noted that the company has “a tremendous amount of flexibility” within its existing real estate portfolio. Approximately 25 percent of its Dick stores will be up for lease renewal at the company’s option in the next three years. Added Stack, “We’re well positioned with significant flexibility related to our future real estate opportunities over the near-term and intermediate-term.”
In the Q&A session, Stack stressed that the company has no store closings planned and its fleet of stores are in “great shape from a profitability standpoint.” But he pointed to the store closings at Macy’s, JC Penney, HH Gregg and Gander Mountain as some signals that prices should significantly come down. Said Stack, “We don’t want to get caught in paying rent higher today than we think we’ll pay two years from now.”
Regarding its efforts to streamline its vendor base, Stack said the company “is encouraged by the progress we’re making in a positive response we’ve received from our go-forward vendors.” He said the company remains on track to eliminate up to 20 percent of its vendors this year in a move to reduce “costs and complexity from our business.”
As part of the plan, Dick’s plan to work closer with a number of strategic vendors. A second group of group of vendors will be more transactional in nature while a third group is being eliminated.
In the Q&A session, Stack said strategic partners have stepped up to the plate around the new matrix realignment. Said Stack, “Where we’ve moved to those strategic partners and have been able to make those investments in their brand, in them, in us, our brand, it’s worked out extremely well. It’s worked out very well in the golf business it’s worked out very well in the footwear business…The reactions have been great.”
At the same time, those positioned as transactional vendors “have really worked hard and provided us opportunities to increase their brand, increase margins, increase returns, to clean up our inventory, etc. It’s been great. What we’ve found is that especially in the strategic partners, we really do have true strategic partners. They’ve been great.”
Meanwhile, Stack said the layoffs come as the company identified “significant costs” that could be eliminated as it adjusts its business model to account for the slowing of its store expansion program, consolidation of its vendor base, and reduction in its dependency on traditional marketing vehicles. The savings will be reinvested in digital, e-commerce and marketing, Team Sports HQ and increase development of its private brands.
“These actions were incredibly difficult but necessary to provide us the headroom to fund and develop our longer-term strategic initiatives,” said Stack. “The past couple of days have been difficult for all of us at Dicks’ Sporting Goods. On behalf of our board and management team we appreciate the efforts of our associate as we move the company into the future.”
Stack also remarked on the management changes announced the week before that saw André Hawaux, COO, retire while Lauren Hobart, formerly head of marketing, became president. Keri Jones, formerly at Target, will join the company on May 22 as EVP and chief merchant. Don Germano, who led the company’s stores organization from 2010 through 2013, will re-join Dick’s on May 30, 2017 as senior vice president, operations.
Stack stressed that despite reports in the financial community, the resignation of Hawaux is “actually a real retirement.” He added, “Andre has been at this a long time, he has done a great job, he has got a new grandchild, he wants to spend time with his family and retirement sometimes really is retirement and this is one of those times.”
Stack said Hobart’s “digital experience and marketing experience” will help position Dick’s for the changing retail landscape. She will continue lead the company’s customer and digital efforts overseeing marketing, e-commerce and Dick’s Team Sports HQ and will also be responsible for its store organization.
Stack said Jones, formerly Target’s EVP of global supply chain, will be responsible for the strategy and execution of merchandising, product development and merchandise planning, as well as allocation and replenishment. Stack had been handling merchandising and he expected Jones and himself will “work very, very closely together going forward.”
He said the new structure overall reflects that the business has become “more complicated” between with the flagship Dick’s business now joining Field & Stream, the larger Golf Galaxy business with the additional Golfsmith stores and Team Sports HQ.
“It’s a very exciting time here and we’re pretty excited about what’s going on in this business and it will give me the opportunity to take a broader view of the business as opposed to being just focused primarily from a merchandising standpoint as I thought I have been in the past,” said Stack.
Looking ahead, Dick’s said it expects earnings in the second quarter in the range of 98 cents to $1.03, which compares to 82 cents in the second quarter of 2016. On a non-GAAP basis excluding severance and other employee-related costs., earnings are projected in the range of $1.02 to $1.07 in the second quarter, representing a gain in the range of 24 to 30 percent.
Last year’s earnings were depressed due to liquidation activity from Sports Authority and other chains
Thirteen new Dick’s Sporting Goods stores will open in the second quarter, including former TSA stores undergoing conversions.
For the year, Dick’s now expects earnings in the range of $3.59 to $3.69, which includes approximately 5 cents per diluted share for the 53rd week. Previously, it expected earnings in the range of $3.63 to $3.73. Non-GAAP earnings, which excludes severance and other employee-related costs, as well as TSA conversion costs, are still expected in the range of $3.65 to $3.75, the same as its prior guidance. The $3.65 to $3.75 range represents a gain 43 to 46 percent.
Consolidated same-store sales are now expected to increase approximately 1 to 3 percent compared to an increase of 3.5 percent in 2016. Under its former guidance, same-store sales were expected to climb between 2 to 3 percent. Comps are expected between 2 percent and 3 percent in the first half of the year and to slow in the second half.
Photo courtesy Dick’s Sporting Goods
