Dicks Sporting Goods saw stronger-than-anticipated 
sales and improved gross margins collaborate to deliver earnings well above previously issued guidance for the second quarter. The addition of Golf Galaxy to the DKS new “family of brands” also pushed sales and earnings higher. However, the most interesting factor contributing to the bottom line was the retailers recent push into branded private label.
Higher price-points and a 1% increase in transactions accounted for the comp sales gain. Cannibalization impacted comps by approximately 1%. At Dick's stores, comp sales increased 7.2%. Adjusting for the shift in the retail calendar, comp store sales at Dick's increased 5.8%. At Golf Galaxy stores, comp sales increased 4.7%. On a shifted basis, pro forma comp sales at Golf Galaxy stores were 5.5%.
Management said that private label represented 17.6% of sales in the Dick's stores versus 17% last year. Seasonally, the second quarter is typically the highest penetration for private-label. On a year-to-date basis, private-label sales represented 15.9% of sales versus 14.9% last year. To date, Dicks has several licensing deals to design, source and sell recognized brands just like they do for their in-house private labels. Management said that private label traditionally gives them gross margin improvement of 600-800 basis points and with these new licensing deals, thanks to the higher ASPs, the company is getting the same margin upside.
Dicks signed a deal with Umbro last year to design and sell soccer footwear and equipment, and the company has more recently inked a deal with Field & Stream for outdoor equipment. Management said that the Field & Stream brand will account for the majority of their outdoor private label sales in the future. In golf, DKS is using the Slazenger brand, which will see a trial roll-out in Golf Galaxy stores, and continues to perform well with the Walter Hagen line.
The licensing deal that has raised the most eyebrows is in baseball, where Dicks just signed a deal with adidas, including gloves, bats, batting gloves, catchers' equipment and training aids. It also looks like the aisle talk SEW heard at OR Winter Market regarding Dicks Sporting Goods licensing the Nike ACG name were true, as the retailer now staffs up to build on that exclusive deal. Other key brand deals are also apparently in the pipeline.
By category, sales were strong in golf, which was described as healthy “across the board” thanks to the new MOI drivers and better apparel sales. While the addition of Golf Galaxy was accretive to the bottom line, management feels that the real synergies wont be realized until 2008, with some upside in Q4 of this year. Golf Galaxy stores were opened in new markets in Sacramento and San Diego and management expects to open more stores in California. While DKS has looked at co-branded advertising between Golf Galaxy and Dicks stores, they have yet to decide which way they are going to go.
The footwear business as a whole was described as “quite good,” with the women's athletic footwear business showing some improvement, but still not as strong as it was when Nike introduced Shox. Dicks management said they are still “quite bullish” on outdoor footwear and training footwear from an athletic standpoint. They also emphasized that their footwear business has not been impacted by the slow-down at some mall-based athletic footwear retailers since they are targeting a very different “performance-oriented” customer.
From the apparel standpoint, technical apparel still continues to perform extremely well at Dicks driven by both Nike and Under Armour.
Management also said that they feel The North Face “is one of those brands than can really help drive sales in the future.”
The companys experiments with branded shop-in-shops have been “quite profitable” for Nike, Under Armour and Dicks. By the end of the year, the retailers will have approximately 100 Under Armour shops, more than 200 men's Nike shops, and more than 150 women's Nike shops.
Six new Dick's stores and two new Golf Galaxy stores opened in Q2. DKS plans to open a third distribution center in Atlanta, Ga. that will bring total network capacity to 670 stores. The location is intended to help Dicks and Golf Galaxy grow deeper into key southern markets like Florida and Texas, with the state of Texas as an “area of focus” for the next few years.
Dicks management increased guidance for the total year, now estimating earnings per diluted share of approximately $2.47 to $2.50 a share, or an increase of 10 cents from previous guidance. For the third quarter, DKS expects to earn approximately nine cents to 12 cents per diluted share, compared to 14 cents in Q3 of last year. The decline in earnings is due to the shift in the 2007 retail calendar and last year's very favorable cold weather. In addition, the inclusion of Golf Galaxy is approximately 2 cents dilutive in Q3.
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