Dick's Sporting Goods Inc reported third-quarter earnings more than tripled with the help of higher sales and lower expenses, handily topping Street estimates. But shares fell 10% last week after it projected that the fourth quarter would fall short of estimates due to increased promotional activity in California and the shift of cold weather product sales into the third quarter.
The increase in promotional activity in California reflects an aggressive advertising campaign and is expected to reduce fourth quarter earnings by about 7 cents a share.
“California, as we know, is one of the hardest hit areas in the country from the economic standpoint right now and we want to make sure that our stores get off to a great start in their first holiday season,” said Ed Stack, chairman and CEO, on a conference call with analysts.
The cold weather shift is expected to have a 3 cents per share impact on Q4. The shift occurred in categories such as apparel and boots rather than hardlines.
“It's across all categories of cold weather products,” said Stack. “So it's across outerwear. It's across the athlete compression component of that, from both Nike, their Pro Combat product, and Under Armour's Cold Gear product. So it's been across all categories; the athletic brands, the outdoor brands.”
Other challenges to Q4 include tough same-store sales comparisons against strong sales of firearms and ammunition a year ago, and continued uncertain consumer sentiment.
“We believe there is much uncertainty around the consumer's attitude towards spending this holiday season, driven in part by the potential impact of healthcare legislation, possible new tax legislation, and the recently-announced 10.2% unemployment rate,” said Stack. Stack added, “The research that we've done [indicates] nobody really believes that this legislation is not going to cost them more money out of their pockets and I think it has really frozen the consumer right now.”
Still, due to the better-than-expected third quarter, DKS raised its target for the year to a range of $1.04 to $1.09 per share from a range of $1.02 to $1.07. That compares to $1.15 earned in fiscal 2008. Comps are expected to decline 3% to 4% for the year.
In the third quarter, earnings of 16 cents a share easily beat the Street's consensus estimate of 9 cents. The 1.9% consolidated same-store increase consisted of a 2.2% increase in DSG and a 1.5% decline in the Golf Galaxy stores.
At DSG, hard lines, apparel and footwear all comped positively in the quarter. The company's combined golf business from DSG and Golf Galaxy stores generated positive comps as well. The overall comp store sales increase at DSG was driven in part by a 2.5% increase in transactions and a decline in sales per transaction of 0.3%.
The company estimated that cannibalization impacted comps by less than 1%.
Stack said that although “there's no highs or lows,” footwear has “been a good business,” partly due to DSG's focus on the athlete.
“We're different than some of the mall-based fashion athletic footwear retailers, where we're really focused on that core athlete, that football player, basketball player, and those businesses have been quite good for us,” said Stack.
The key driver of apparel has been The North Face, “which has been a great brand,” said Stack. He also pointed to some success with better Columbia product and both brands helped DSG avoid a “big deterioration” in average unit retail (AUR).
Fitness has moved from heavy equipment to product more focused on core development, stretching and flexibility at much lower average unit retail.
“Our fitness business has been not bad under the circumstances and we're fairly pleased with it, but those average unit retails in fitness have certainly come down,” said Stack.
Stack did note that cardio remains strong with the launch of Livestrong cardio product delivering “very good results” in the period.
At Golf Galaxy, year-over-year sales, gross profit margins, and operating efficiencies improved in Q3 compared to the year-over-year results in Q1 and Q2, partly due to efforts to not become as promotional as competitors in the space.
Stack said they were “very pleased” with the inventory levels and quality of the inventory at Golf Galaxy.
Overall gross margins shrank 40 basis points, primarily driven by a 65 basis point decrease in merchandise margin — due to clearance activity at Golf Galaxy and promotions and clearance activity at DSG. SG&A improved 150 basis points, primarily from a reduction in advertising and payroll. Inventory declined 8.6% per square foot.
In 2010, DKS expects to add at least 24 DSG stores and five Golf Galaxy stores. It opened 11 stores in the third quarter, including six in Oregon as a result of the closing of Joe's Sports & Outdoors. In total, it opened 24 stores in 2009. Stack said DSG's launch in the Pacific Northwest ranked “among the best grand openings we've had in a couple of years” and the retailer plans to “stay pretty aggressive” expanding in the region.
Stack also said the ability to acquire former Joe's Sports leases underscores the company's ability to benefit from opportunities in the downturn.
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