Dick’s Sporting Goods became one of the few retailers across channels to see second-quarter results surpass Wall Street targets and raise its guidance for the year. Lauren Hobart, president and CEO, told analysts Dick’s customers over the last two years have made “lasting lifestyle changes” that continue to drive robust demand while an increasingly differentiated product assortment elevates margins.

In the quarter, sales declined 5.0 percent to $3.11 billion against record, pandemic-fueled year-ago levels. Wall Street’s consensus estimate had been $3.07 billion.

Same-store sales fell 5.1 percent against a gain of 20.2 percent in the year-ago period.

On an adjusted basis, earnings were down 36.4 percent to $318.5 million, or $3.68 a share, from $501.2 million, or $5.08 a year ago. EPS surpassed Wall Street’s consensus estimate of $3.58.

The adjusted results eliminate the impact of certain items related to its convertible senior notes issued in Q120. The current quarter included $6.6 million of inducement charges related to its exchange of $100 million in outstanding principal of its convertible senior notes.

On a reported basis, net income declined 35.7 percent to $318.5 million, or $3.25, from $495.5 million, or $4.53, a year ago.

“We are very pleased with our second quarter results, which demonstrate the strength of our core strategies and the foundational improvements we’ve made across our business over the past five years,” said Hobart on Dick’s analyst call.

She noted that Dick’s delivered approximately the same EBT (earnings before taxes) in the latest quarter as the chain did in all of fiscal 2019.

“While the macroeconomic environment remains uncertain, the Dick’s Sporting Goods consumer has held up quite well,” said Hobart. “Over the past two years, they’ve made lasting lifestyle changes focused on health and fitness, sports and outdoor activities, and we remain uniquely positioned to capitalize on these secular trends. Our inventory is healthy and well positioned with improved in-stock levels in key categories.”

Outlook Raised
For the full year, Dick’s now expects comparable store sales to climb in the range of negative 6 percent to negative 2 percent, up from negative 8 percent to negative 2 percent previously. Full-year EPS is now projected in the range of $8.85 to 10.55 ($7.95 to 10.15 previously) and adjusted EPS to range between $10.00 to 12.00 ($9.15 to 11.70 previously.)

Hobart said the outlook “continues to incorporate an appropriate level of caution, given today’s macroeconomic environment,” and contemplates an approximate 10.7 percent EBT margin at the midpoint.

Hobart added that Dick’s expects a “slightly more normalized pricing and promotion environment” for the back-to-school and holiday selling periods. She added, “If you look versus last year, it was an incredibly benign pricing promotion environment. But all of that is reflected in our go-forward guidance. We’re not expecting any surprises there.”

Elaborating on the quarter, Hobart noted the 5.1 percent comp decline marked an improving trend sequentially from an 8.4 percent first-quarter decline.

Dick’s sales further continue to run “substantially” above pre-COVID levels, up 38 percent versus Q219, reinforcing that the favorable shift in consumer behavior “is durable, and our actions to capitalize on this shift are yielding strong results,” according to Hobart.

All customer success metrics, inclusive of acquisitions, new customer retention, repeat purchasing and omnichannel behavior are elevated across the board compared to pre-COVID levels.

Footwear, Team Sports And Golf Pace Q2 Sales
Stand-out categories in the quarter were footwear, team sports and golf.

“Footwear, in particular, is really strong, given our assortment is absolutely best-in-class, and that’s driving incredible success with our customers,” said Hobart. “Team sports have been back and that business is very strong. We were really pleased with the golf business, which sequentially accelerated in Q2 versus Q1 and still remains significantly above 2019.”

Athletic apparel was the only core category that was slightly challenged in Q2, reflecting some late shipments in apparel, where some spring products came in on top of back-to-school products.

Hobart added, “But even within apparel, once the products started flowing, and our teams have done an absolutely incredible job flowing product and getting it into the stores, in July, we started to see comp significantly improve in athletic apparel as well. So overall, really, really strong across the categories.”

Merchandise Margins Well Above Pre-Pandemic Levels
Gross margins in the latest quarter were down 388 basis points versus last year to 36.03 percent, as expected. The decline reflects a reduction in merchandise margin rate by 197 basis points, higher supply chain costs and deleverage on fixed occupancy costs from lower sales.

The merchandise margin rate was up 439 basis points versus Q219 “as we maintain the majority of the merchandise margin expansion that we drove over the past two years,” said Hobart.

She said margins continue to benefit from efforts started pre-pandemic to increase differentiation across its product mix.

“The content of the product that we carry today is very different from the product that we carried five years ago,” said Hobart. “It’s higher heat and more narrowly distributed than what you’ll find in the marketplace and therefore, it is not as susceptible to promotions.”

Sophisticated pricing tools that enable Dick’s to surgically adjust pricing and promotions are also helping the retailer to maximize margin opportunities.

Lastly, margins are benefiting from shifts in the retailer’s product mix toward higher-margin categories. Dick’s has materially reduced exposure to the hunt category, which had margins approximately 1,700 basis points below the company average in 2019. Dick’s also continues to expand private-label or “vertical” brands, which currently have margins between 600 to 800 basis points above national brands.

Hobart said, “Looking ahead, we remain very confident that our merchandise margin will be meaningfully higher compared to pre-COVID levels on an annual basis and that this improved profitability is sustainable due to these foundational changes in our business.”

SG&A expenses increased 2.7 percent to $657.4 million and expanded as a percent of sales to 21.12 percent from 19.55 percent due to the sales decline. The increase in SG&A dollars was driven by continued investment in hourly wage rates and talent to support growth strategies.

With structurally higher sales, expanded merchandise margins and operating efficiencies compared to pre-COVID levels, Dick’s double-digit EBT margin of 13.73 percent, is approximately two times its Q219 EBT margin of 6.69 percent.

Increasingly Experiential In-Store Experience
Calling out other factors to Dick’s recent success, Hobart pointed to the enhanced in-store experience, supported by elevated pay and higher pay for associates. She said, “Our teammates are highly trained and are focused on creating confidence for our athletes by finding the best product for them.”

She pointed to Dick’s ability to attract and retain store employees a “key differentiator and a competitive advantage for us.”

The store experience over the years has also been increasingly elevated by “highly experiential elements,” including premium full-service footwear decks, elevated soccer shops, golf simulators, and HitTrax batting cages. Newer concepts, including Dicks House of Sport and Golf Galaxy Performance Center, have provided “valuable learnings while also driving strong sales and profitability.”

Digital investments are focused on advancing personalization capabilities to support one-on-one exchanges with its over 25 million active ScoreCard loyalty members via digital marketing, including offering relevant products. ScoreCard members generated well over 70 percent of total sales in the quarter, up approximately 200 basis points from the same period last year.

Omnichannel capabilities were also cited as “an important competitive advantage.” Stores enabled over 90 percent of total sales, including e-commerce and in-store pickup.

On merchandising, Hobart described the chain’s brand portfolio as “a tremendous asset.” Recent survey data shows approximately 80 percent of active customers look to Dick’s for a multi-branded shopping experience.

“Importantly, our relationships with key brands remain stronger than ever, and we are continuing to develop relationships with new and emerging brands,” said Hobart. “At the same time, we are creating and growing disruptive vertical brands like Calia, VRST and DSG. Our assortment is on trend across categories, and our wide range of price points ensures we are able to meet the needs of all athletes.”

Dick’s quarter-end inventory levels increased 49 percent year over year with apparel among the categories seen as “a bit heavier” year over year. However, year-ago inventory levels were depressed amid significant supply chain disruptions. Compared to Q219, the 40 percent increase in inventory was relatively in line with its 38 percent increase in sales over stores three years.

“Our inventory is healthy and well positioned,” said Navdeep Gupta, CFO. “We are excited about the assortment we have in place for the important back-to-school season, and we are prepared to continue navigating a dynamic global supply chain environment through the rest of the year.”

Photo courtesy Calia