Speaking last week at the Bank of America Merrill Lynch Consumer and Retail Technology Conference, Dick’s Sporting Goods’ officials elaborated on its exit from the fitness tracker category and challenges in firearms. But much of its presentation was spent discussing growth opportunities on the footwear and apparel side with brands including Nike, Adidas, Brooks and Patagonia as well as its numerous private labels.
The meeting came a day after Dick’s released fourth-quarter results. Earnings declined in the quarter but arrived at the upper end of guidance. More importantly, Dick’s officials provided earnings guidance for the current year that was well ahead of Wall Street’s targets as innovation from several brands is expected to result in less margin pressure in 2018 than previously anticipated.
Dick’s officials were first asked about their move to temper sales expectations for 2018 with the new outlook calling for same-store sales to be flat to down low-single digits. Wall Street had expected flat comps. DKS officials on its Q4 conference call attributed the change to challenges in the fitness tracker and hunt category.
Ed Stack, Dick’s chairman and CEO, said the performance tracker business “at one time was a pretty good business” for Dick’s but had continued to deteriorate over the last few years. Dick’s was hoping the business would pick up in the fourth quarter but the category continued to struggle.
Said Stack, “There’s been significant margin pressure and we’ve decided that we would be best off to basically exit that business. We’ll still have a little bit of product there, but the amount of floor space that we put to that and the time and effort, we don’t really feel that that’s worth it.”
The lowered expectation in the hunt category reflects the anticipated fallout from Dick’s decision announced on February 18 to stop selling assault-style weapons and high-capacity magazines following the tragedy in Parkland, FL. The company also stopped selling guns to anyone younger than 21.
Stack said Dick’s felt “that we did what was really right” with the policy change but still feels they are “going to have some blowback and some pushback on that business. It’s going to be even softer than we had originally anticipated.” Dick’s has also said it expects some hunt enthusiasts may stop shopping at the chain.
Stack still said he remains “relatively optimistic” about the rest of its business, citing healthy prospects for athletic apparel, athletic footwear as well as golf and team sports.
Asked which brands Dick’s planned to invest more in this year versus last year, Stack said the “biggest investments” will be in its private brands, which delivered double-digit comps in the fourth quarter on higher margin rates.
The chain’s three primary private labels are Calia, Field & Stream and Reebok. Field & Stream is Dick’s largest private label brand at both Dick’s and its Field & Stream chain and is represented across a wide range of products from boots to fleece, sleeping bags and tents. Stack added that the brand can “do better” in extending apparel and the company is “introducing a Field & Stream kayak and the paddle sports this next year.”
The second largest brand is Reebok, which has grown at a “very fast rate,” although it is primarily opening price-point apparel.
Stack said the company is “extremely excited about what’s going on with” Carrie Underwood’s Calia collection. The line launched in 2014 and has become the chain’s third-largest athletic women’s label. The Calia line will continue to be broadened in 2018.
Stack added that its own golf brands “have done extremely well,” citing Walter Hagen on the apparel side and Top Flite in equipment.
He also noted that the company will soon be relaunching Tommy Armour in the golf equipment category and has a potential break-out item with a $299 driver done in partnership with BMW. Said Stack, “We had our Golf Galaxy Summit down in Florida where all the brands come in, show the new product to the Golf Galaxy managers. And these guys are really hardcore golf guys. And the number of comments I got and notes that I got back after they tested the Tommy Armour driver, the view was that they thought that was the best driver out there. They were really excited about that. So, we’ll continue to invest really heavily in our private brands.”
Among national brands, Stack said Dick’s is “investing heavily“ in Nike, Adidas and Callaway. He added, “We think that the innovation pipeline there is great.”
Stack praised Nike and Adidas for their stepped-up efforts to improve segmentation and said the chain securing better allocation from both.
“We’re getting access to a broader range of product and more product,” said Stack. “The Nike React shoe is a perfect example. We were one of the key leaders in the marketplace with that shoe, as I said, at $150 and it blew right out. We worked with Nike on what we were going to do in-store from a presentation standpoint, what we were going to do from an online standpoint, what we were going to do from a digital marketing standpoint and it was beyond our wildest dreams. We’ll continue with that going forward with the React and some takedowns on the React.”
Specifically asked about investments in Adidas, Stack said the chain has about 300 Adidas shops currently and plans to add “a few more.” He said better footwear allocation is in part due to Adidas shops in its footwear sections and similar partnering of in-store in merchandising is helping Adidas apparel grow. Said Stack, “They’ve been great partners to work with and we’re going to continue to invest really heavily with those guys.”
Among other footwear brands, Stack noted that Brooks “has been terrific” and listed them among the core brands to receive greater shelf space. Stack said, “We’re really excited about what we can do from a running standpoint and Brooks is the brand that we’re going to invest much more significantly in to drive the running business.”
Overall, Stack said inventories across the industry are “cleaned up a little bit better” due in part to vendors’ efforts to both control stock and their segmentation efforts, and that is “helping our margin rates going forward.” On footwear, Stack expects “there’ll be still some promotion in footwear. But the key items will again be sold at full price.”
In apparel, Patagonia “was, by far the key player from a comp standpoint” in outerwear. Overall, he said outerwear was “pretty good” in 2017, although it remains dependent on weather.
Asked about Under Armour, Stacks inferred that the turnaround may not happen until 2019. Under Armour faced “significant weakness” in the fourth quarter that Dick’s officials on its Q4 conference call traced to its expansion to Kohl’s and other stores as well as the overall promotional climate. Said Stack, “I think Under Armour is going to get it figured out. I know they’re working really hard. Kevin and I have been talking and they’re going to get it figured out. I just don’t think there’s going to be a meaningful change this year. We would look at probably 2019 as the time where there’s a meaningful change there, hopefully.”
Asked about the overall health of golf, Stack said 2017 was “really very good” for the category due to less competitive pressure with Golfsmith going out of business and innovation arriving from both Callaway and TaylorMade in both drivers and balls. Stack expects golf to “be pretty good” this year, again led by strong launches such as the Callaway Rogue driver and the TaylorMade M3 and M4 drivers.
Stack further noted that Tiger Woods’ recent strong performance, as well as Phil Mickelson’s win at the WGC-Mexico Championship, draws attention the category. Said Stack, “There is some real juice in golf right now. And everybody is pretty jazzed to see what might happen at the Masters. So, we’re more enthusiastic about golf.”
Asked about team sports, Stack said Dick’s is “enthusiastic” about most categories with the exception of football.
Baseball has been “very good” recently and is expected to remain strong in the first and second quarter because of new bat regulations for little league players. Stack said the company has been “very aggressive on how we approached” the bat regulation change and is in the process of reordering bats and “trying to take a bigger position.”
He noted that the sales lift appears to be similar to the impact from the BBCOR regulation change that affected high school age and college baseball participants in 2012.
In other team categories, the company remains “excited” about soccer’s opportunity for growth. Stack while the retailer wished the U.S. team had made this year’s World Cup, the sport remains “one of those growth areas that we’re pretty enthusiastic about,” in part due to shifts away from football participation. He also cited the retailer’s relationship with Nike and Adidas as well as a private-label focus on soccer.
The category that has “some struggles” is football and it’s “worse” the younger the athlete. Said Stack, “There’re just so many parents saying, ‘[My] kid’s not playing football.’”
On the positive side, Stack said kids “haven’t stopped playing a team sport. They’ve gone in a different direction.” Dick’s has noticed a pickup in fall baseball as well as fall soccer. Stack added, “We’re fine with baseball because the ticket in baseball is more than the ticket in football.”
Lee Belitsky, EVP and CFO, added that through its Team Sports HQ program the company has “accumulated millions of kids’ worth of registration information” on youth playing soccer, baseball and other sports. That provides insights not only into sport participation but the ability to deliver targeted marketing to the registrants that Target, which has put a focus on soccer, as well as Amazon, can’t do.
Other insights offered during the presentation include:
- Online sales have “accelerated as we’ve gone into Q1,” said Hobart. Dick’s had faced “intermittent issues” in the quarter due to the transition to a new platform that impacted checkout and navigation. But Dick’s has “gotten on top of most of those issues.”
- Women’s is expected to lead growth in apparel in 2018 following a year when it “had been kind of stale from some of the brands.” More space is being dedicated to women’s. Kids apparel likewise “wasn’t very good” in 2017 and is expected to see healthier gains in 2018 as its assortment is further built out. Men’s was the top performer in apparel in 2017, led by strong product from Nike.
- Asked about potential acquisitions, Stack said, “I think there’ll be some consolidation going forward. You should look at us as an organic grower. I can’t say never; [it] kind of depends on price, all of that, but I don’t see anything from a brick-and-mortar standpoint that we would be interested in acquiring. If we did any acquisition, it would be more in the digital space than the brick-and-mortar space.”
Photo courtesy Dick’s Sporting Goods