Dick’s Sporting Goods reported better-than-expected fourth-quarter results and outlined a number of initiatives to jump-start comp growth, including replacing its hunt sections in another approximately 125 stores with faster-turning categories and switching out its licensed Reebok brand for a new private-label athletic label. But shares of Dick’s fell as management predicted only minimal top-line recovery in the current year.
On Tuesday, shares of Dick’s were down $4.28, or 11.01 percent, to $34.61. The stock’s 52-week range is between $29.53 and $40.87.
On a conference call with analysts, officials were bullish on continued improvement in the current year.
“As we enter 2019, we’re enthusiastic about our business,” said Ed Stack, CEO. “We’re excited about the strategies we’re pursuing, encouraged by our athletes’ early response to them and confident in our ability to convert this momentum into positive comp sales beginning in the second quarter.”
But the retailer’s 2019 guidance was conservative. Comp are expected to be flat to up 2 percent for the year against to the 3.1 percent slump seen in 2018.
First quarter comps are still expected to be impacted by the company’s decision to halt sales of assault-style weapons in their stores, along with the sale of guns and ammunition to customers under age 21 following last February’s mass shooting at a Parkland, FL high school. The bat category is also facing tough comparisons early in the year against the 2018 season, when new standards for youth bats imposed by USA Baseball led to a spike in bat sales. Finally, as noted by some other retailers, cold weather has led to a slow start to spring selling.
Results in the fourth quarter ended February 2 were skewed by the current quarter running 13 weeks compared to 14 weeks the prior year.
Net income came to $102.6 million, or $1.07 per share, ahead of Wall Street’s consensus estimate of $1.06. But that’s down 13.1 percent from year-ago earnings of $118.0 million, or $1.13 a share, excluding the impact of the extra week and non-recurring items.
Net income in the year-ago quarter came to $116.0 million, or $1.11, including a 9 cents a share benefit from the extra week and non-recurring charges totaling 11 cents a share. The non-recurring charges related to transition costs incurred to enhance the company’s Scorecard loyalty program and costs related to a litigation contingency. Excluding the charges, non-GAAP earnings in the latest period would have been $127.3 million, or $1.22.
Other highlights in the quarter include:
- Net sales slid 6.5 percent to $2.49 billion due to the calendar change. Wall Street’s consensus target had been $2.48 billion.
- Consolidated same store sales decreased 3.7 percent on a 13-week versus 14-week basis. Fourth quarter 2017 comps declined 2.0 percent. On a 13-week to 13-week basis, comps slipped 2.2 percent in the latest period.
- Transactions were down 3.1 percent while average ticket lifted 0.9 percent.
- Top performing categories in the quarter were apparel, athletic footwear, outdoor equipment and private brands.
- E-commerce revenues grew 17 percent, adjusted for the extra week last year. E-commerce penetration was approximately 23 percent of total sales in the quarter versus 19 percent during the fourth quarter of 2017.
- Gross margins were down 125 basis points to 27.87 percent. On a non-GAAP basis, gross margins declined 168 basis points. The decline was driven by higher shipping, fulfillment and freight costs as a result of strong e-commerce growth and by occupancy deleverage.
- Merchandising margins were down 37 basis points due to expense recognition changes in its ScoreCard program and revenue recognition and reporting changes for gift card breakage. Excluding those items, merchandise margins were flat.
- SG&A expenses declined 7.5 percent on a GAAP basis to $552.2 million, or 22.16 percent of sales, from $596.9 million, or 22.40 percent, a year ago. On a non-GAAP basis, SG&A was down $38 million on a 13-week-versus-14-week basis and off $11.5 million excluding the extra week. Expense reductions more than offset strategic investments and higher incentive compensation. On a non-GAAP basis, SG&A was flat as a percent of sales.
Among categories, apparel and athletic footwear saw comp gains in the low-single digits, driven by key brands. Both categories showed improvement compared to the prior quarter, according to Lee Belitsky, CFO, on the call. Outdoor equipment and fitness each posted “strong comp increases.” Outdoor equipment was aided by improved in-stock positions and the addition of new Strikepoints in-store sections that highlight key product and brands, such as Yeti. Private brands also continued to comp positive in the quarter with higher penetration.
Those gains weren’t able to offset double-digit declines in hunt and electronics. The company will be anniversarying its firearms move in March. Dick’s left the electronics category in the year-ago fourth quarter. Excluding the hunt and electronics areas, comps were up 0.8 percent in the fourth quarter.
Team sports also saw a comp decline in the fourth quarter as it faced tough comparisons against the year-ago bat regulations change.
In the year, earnings reached $319.9 million, or $3.24, down from the prior-year’s net of $323.4 million, or $3.01, which included a benefit of 9 cents a share for the 53rd week. On a non-GAAP basis, the year-ago net would have been $324.3 million, or $3.01, which also included the 9-cent-a-share benefit.
Net sales decreased 1.8 percent to $8.44 billion. Adjusted for the calendar shift due to the 53rd week in 2017, same store sales decreased 3.1 percent on a 52-week to 52-week comparable basis. Headwinds from hunt and electronics categories negatively impacted comps by 2.3 percent.
On the call, Stack noted that full-year earnings of $3.24 was near the high end of its guided range of $3.15 and $3.25. The quarter’s adjusted comp decline of 2.2 percent was in line with expectations with underlying sales momentum “a bit better” in the fourth versus the third quarter.
“We’re very pleased with the performance of our core business during the quarter,” said Stack. “Our athletes have responded positively to many of our initiatives across merchandising, e-commerce and marketing and drove comp gains across key categories including apparel, athletic footwear, outdoor equipment, fitness and our private brands.”
Stack and Lauren Hobart, president, spent much of the call detailing newer initiatives to revive traffic. Said Stack, “While we’re pleased with the results achieved so far, we know that we need to continue to reinvest in our business to meet the changing needs of our athletes and increase their engagement with us.”
Three key investment areas include enhancing the in-store experience, improving e-commerce fulfillment capabilities, and implementing technology solutions to improve the customer experience and associate productivity.
At the store level, Dick’s plans to continue to optimize assortments, including reallocating floor space to “regionally relevant and growing categories and make our stores more experiential,” said Stack. Several initiatives tested last year will be built on.
In the third quarter, the hunt category was removed from 10 Dick’s stores where it underperformed and replaced “with a more compelling assortment,” said Stack. These 10 stores generated positive comp sales plus a strong margin-rate improvement during the fourth quarter. As a result, the hunt category will be removed from another approximately 125 Dick’s stores where the category is underperforming in 2019.
Stack said Dick’s will likely remove hunt from more stores in 2020 if the improving comps and margin scenario continues. He said in the Q&A session, “This is around having productive space. And there is some places that the hunt business is very good, other places that it’s not very good. And we’re just allocating floor space to make our boxes more productive. And the 10 stores we’re pretty enthusiastic about the response we have there.”
Dick’s also last year tested “bold merchandise presentations,” entitled Strikepoints, in some stories that provide customers “with a clear point of view of what’s important and showcase key items in a very impactful way.” With a positive response from those tests, Strikepoints sections will be expanded across the chain beginning late in the first quarter.
“Key merchandise categories will benefit from this improved presentation along with a strong product pipeline from several of our key strategic vendors, as well as our private brands,” said Stack. “Our relationships with our brands have never been stronger and our access to differentiated and premium product continues to improve.”
Another successful test came from the installation of HitTrax batting cages in several stores to enable customers to test bats and view metrics such as launch angle, exit velocity and distance. Also seeing strong engagement from shoppers, the HitTrax has already expanded to 150 locations. Said Stack, “We believe our HitTrax experience and expended and more compelling product assortment and improving the integration of our GameChanger app will make us the destination for baseball athletes from the recreational to the enthusiast player.”
Finally, private brands grew double-digits in 2018, increasing as a percent of sales to 14 percent from 12 percent. For 2019, private brands are expected to again “play an important role in our space allocation and assortment strategies.”
Calia, its women’s fitness line backed by Carrie Underwood, will expand its footprint in approximately 80 stores. A new athletic apparel brand is also set to launch in time for back-to-school that will replace its licensed Reebok line.
In the Q&A session, Stack said the new collection will be “very different” than its Second Skin in-house compression line with focus on opening price-points. The new line will have “meaningful floor space;” run across mens’, womens’, boys’, and girls; and initial research on its potential “has been really very positive.”
Hobart added that the new brand will reach “white space” that Reebok or other brands weren’t reaching in the store. She said, “It’s an occasion that we are not currently getting in the opening price point area and feel that we can drive new traffic and occasions into the store.”
Stack added that further investments will be made in its product development team “to help us reach our $2 billion sales goal in private brands.”
Hobart said Dick’s plans to ramp up investments in training and education for associates. For example, in partnership with key brand partners, a new multi-day footwear training summit is being launched to elevate associates’ product expertise and selling skills. Said Hobart, “This focus on training will enhance our service model and it will also support new and differentiated experiences for athletes such as HitTrax.”
Associates also recently began using an app, called Merch Search, that provides real-time product information including detailed descriptions, inventory availability, and alternative product recommendations to provide a higher level of assistance to in-store shoppers.
E-commerce benefited this past holiday season from enhanced assortment and better functionality as well as working closer with Google and Facebook to drive digital marketing. For 2019, the investment focus will be on “faster and more reliable delivery.” As noted in its third-quarter conference call, two dedicated e-commerce fulfillment centers will open in New York and California during the third quarter. The centers will enable Dick’s to deliver the majority of online orders within two business days.
The New York facility also features investments in robotics to drive automation and optimize cost per shipment. Other online investments include rolling out a faster and more convenient checkout, improving page responsiveness and adding new content through its Pro Tips platform. Mobile and tablet sites will also be re-platformed this year.
On the marketing front, Dick’s new integrated and inspirational marketing campaign, Better Starts Here, is expected to encourage customers to explore the chain’s newly expanded enthusiast level assortments. Efforts will be made to further leverage ScoreCard and Team Sports HQ datasets to drive traffic through timely and targeted messaging.
On the cost side, Hobart noted that Dick’s eliminated approximately $30 million of expense in 2018 and has identified cost cuts in a similar magnitude for 2019. Those savings will be help offset the cost of strategic growth investments.
Inventory levels at the close of the year increased 6.6 percent as Dick’s made strategic investments in support of key growth categories. Added Belitsky, “Our inventory going into the first quarter is clean and we are confident of our inventory position as we enter the spring season.”
Elaborating, Stack noted the company underinvested last year in some key categories, particularly fleece heading into the holiday a season, but also believed its missed opportunities in areas such as Nike Legend T-shirts, Nike fleece and tights, Adidas running and training footwear, Calia product and golf apparel. He said its basic product that management doesn’t expect will require promotions and in some cases is being supported by its Strikepoints’ program. Said Stack, “That is really a go-forward product that is not toxic, it doesn’t have a short shelf life. And that’s what we’ve done with these Strikepoints and they’ve been extremely successful.”
In the Q&A session, Belitsky said Under Armour “continues to be difficult” and the company has been able to make up for losses at Under Armour in apparel with other brands. Stack reiterated comments from the third-quarter conference call that Under Armour’s efforts to improve differentiation are expected to improve the brand’s results inside Dick’s. But Stack indicated that Under Armour isn’t expected to regain any shelf space in the near term.
Said Stack, “We’re enthusiastic about our Under Armour business going forward. But it will remain in the floor space that it has today. So there won’t be any additional floor space allocated there. And a couple of our brands we’re really excited about the product that they’re bringing to market. Nike, in particular, we’re really enthusiastic about the apparel product and the footwear product tat they’re bringing to market and we’ve made a big bet there.”
For 2019, the estimate of flat to plus 2 percent comps for the year assumes positive comps arrive beginning in the second quarter. The firearm’s announcement will be anniversaried at the end of February. Dick’s expects its hunt business to generally follow industry trends this year and overall sees a decline.
The strategic investments this year are expected to cost $60 million, including $35 million to enhance the in-store experience, $15 million to improve e-commerce fulfillment capabilities, and $10 million in technology. The $30 million in expense savings is expected to come from supply chain efficiencies, changes in benefits and rent.
Operating margin is expected to decline by 20 to 40 basis points year-over-year due to the strategic investments.
Gross margins are expected to be approximately flat to down slightly, driven by anticipated double-digit sales growth in the e-commerce which has lower gross margin rate and from the related fulfillment investments.
SG&A is expected to deleverage as a result of strategic investments. Additionally, guidance assumes modest merchandise rate expansion and meaningful inflationary headwinds from increasing hourly wages and higher freight costs.
Capital expenditures are expected to be approximately $200 million which will be concentrated in improvements within existing stores technology and e-commerce fulfillment and also includes seven new Dick’s stores and two new Golf Galaxy stores. In 2018, capital expenditures were $170 million. During 2018, 19 Dick’s stores opened and six closed.
Image courtesy Dick’s Sporting Goods