Dick’s Takes a Hit from Galyans Stores Performance Shortfall…

Dick’s Sporting Goods shares took a beating for the week after the retailer had to admit that they may have over-estimated the performance at the acquired Galyans stores that were all converted to the Dick’s Sports Goods nameplate this spring. Management said the stores were performing more like a Dick’s store in a new market, but they had been planned to outperform those types of stores. The revelation led to questions about the price paid for the Galyans stores instead of opening new Dick’s locations, but company chairman and CEO Ed Stack stuck to his guns, suggesting that the cost of entering new key markets like Atlanta, Chicago, Dallas, Denver, and Minneapolis would have been more difficult with Galyans there as a competitor. He called the Q2 shortfall a “temporary blip from a planning standpoint.”

The conversation about the Galyans issue dominated the quarterly call with analysts last week, overshadowing the fact that DKS beat its EPS guidance for the period. Excluding extraordinary merger, closing, and integration costs, as well as one-time benefits from the sale of GSIC stock, the retailer reported net income of $24.2 million, or 45 cents per diluted share, for the second quarter. Net income more than doubled on a pro forma basis and was up 23.4% on a GAAP basis.

What hurt DKS the most was a reduction in full-year EPS guidance, which is now seen in the $1.70 to $1.75 per share range, down 12 cents from the retailer’s most recent guidance. Mr. Stack did reiterate throughout the call that the revised guidance is in line with their original guidance when they first acquired Galyans.

The other issue for the retailer was comp sales, which came in about a half-point to 1.5 points below estimates, a shortfall Stack said was due primarily to cannibalization.

Mr. Stack said that key categories like golf and athletic footwear, which were expanded in the Galyans stores, increased substantially over historic Galyans levels, but fell short of their internal plan. Stack said the athletic footwear business has been “pretty solid,” but they saw some slowdown in the fashion end of the business. Stack also said athletic apparel in men’s and women’s had been “pretty good.” In-line skates and paintball continue to trend down and he described the outdoor business as “okay,” but “it hasn’t been awful.” In fitness, Stack said the cardio business has been “performing better” than the strength business.

As far as learning from the Galyans mix, Stack said the boat business they took into some key Dick’s stores did “very well.” He also said some of the higher-priced firearms had done “extremely well.” He was also looking forward to the back half of the year and expanding the commitment to The North Face. The snow sports business, which will be primarily snowboard-focused will be in about 35 doors for fall.

One area Dick’s dropped out of the mix was TNF bikes, which they thought they could sell due to their existing bike business. The business apparently had not been good for Galyans either.

Private label was 14.5% of sales in the second quarter, up from 13.7% of sales in Q2 last year for the Dick’s-only stores and 9.4% for the combined business on a pro forma basis.

Part of the issue for the former Galyans stores was ad frequency, which Dick’s sees changing immediately. Stack said the program will be identical to the standard Dick’s program in the fourth quarter.