Although Dick’s Sporting Goods earnings fell during the second quarter, they werent as bad as expected, thanks to slightly better-than-expected sales and margins. The big surprise was the 46 basis point improvement in merchandise margins, partly driven by the continued success building its private brand programs.
Second quarter net income slid 5% to $45.5 million, or 39 cents per share, excluding the impact of costs related to the Golf Galaxy integration. These results exceeded earnings guidance provided in May of 34 cents to 38 cents a share. In Q207, DKS earned $47.9 million, or 41 cents. Including the after-tax impact of costs related to the Golf Galaxy integration of $4.4 million, or 4 cents a share, DKS’s net income was $41.1 million, or 35 cents a share, in the latest period.
The comp decline was driven by fewer transactions, partially offset by higher sales per transaction. Cannibalization impacted comps by approximately 1%, similar to recent levels.
Comps declined 3.7% at Dick’s Sporting Goods stores and 4.5% at Golf Galaxy. Of the negative 3.7% comp from the Dick’s chain, 50 basis points were from the discontinuation of Heelys. Golf and categories more dependent on gasoline usage, such as tackle, camping and water sports, also saw notable declines. Athletic footwear, excluding Heely’s, and athletic apparel performed well in addition to team licensed sports.
Company Chairman and CEO Ed Stack said private brand growth was a “key driver” in its 46 basis point improvement in merchandise margins. He highlighted the launch of Reebok performance apparel and the Field & Stream brand, along with the continued success of adidas baseball and Nike ACG. Other factors driving the margin improvement was better markdown management, tight inventory controls, and some advantageous buys in the market.
Inventory levels were down approximately 2% per square foot. Clearance inventories were down 8.7% at quarter-end. Gross margins eroded slightly as the expanded merchandise margins and lower freight costs were offset by increased distribution and occupancy costs. The 90 basis point hike in SG&A was due to the timing of advertising initiatives. Stack noted that they still expect to continue to expand the private brand business.
Among categories, Stack said the performance apparel business has continued to be positive, and is not seeing any notable price resistance from consumers. Yoga will be tested during Q308, but Stack cautioned that it wont be a “game-changing aspect of the business.” The Heelys impact “gets a lot better” in Q408 as most Heelys product was cleared the day after Thanksgiving last year. The bicycle business has been “very good,” and the kayak/paddling business was “really very good,” in Q208, partly due to product mix. But bigger ticket items overall have been a particular struggle, particularly in fitness. Golf came in about where it was expected.
Although the promotional nature of the primary golf business “seems to have subsided,” the overall category isnt expected to get healthier very soon. He said that there was a “real market share gain opportunity” for them between both the Dick’s Sporting Goods stores and the Golf Galaxy stores, but they did expect the golf business is going to be “a little bit difficult through 09.”
Concerning the recent acquisition of Chicks Sporting Goods in Southern California, DKS plans to convert one Chick’s store to a Dick’s store in Q3, with the remaining Chick’s stores to be converted in the back half of 2009. Stack said Chick’s was performing largely in line with expectations.
Asked about TSA’s announcement last week that it plans to open 37 stores in 2008, Stack said, “They have never really stopped opening stores, like some of our other competitors in some of the outdoor categories, (which) have significantly reduced their store count. But Sports Authority is looking into California. We have seen some activity in Chicago. But we have competed with Sports Authority for a very long time. They have continued to open stores and we really dont see it having a big impact on us.”
Asked about Under Armour opening its third full-price stores, Stack said DKS has had “some very direct conversations” with a number of vendors opening stores “to make sure that we understand exactly what their plan is and what theyre doing.”
Regarding the 2008 outlook, DKS now anticipates consolidated EPS of approximately $1.27 to $1.36 for 2008, excluding Golf Galaxy integration costs. The previous guidance called for EPS between $1.22 and $1.36. Comps are expected to decrease approximately 5% to 3% in 2008, versus a 2.4% gain in 2007.
For Q3, EPS is expected to range between 4 and 8 cents a share, excluding Golf Galaxy integration costs. EPS was 10 cents a share in Q307. Comps are expected to decline 2% to 5%. Merger and integration costs are expected to be $2.5 million in Q3 and $3.3 million in Q4.
