Shares of Dick’s Sporting Goods closed up nearly 10 percent on Wednesday despite the retailer slashing its guidance for the year due to broader macroeconomic pressures.
Lauren Hobart, CEO, told analysts the revision was pre-cautionary while expressing confidence that Dick’s would continue to benefit from the sports and outdoor hobbies consumers began during the pandemic.
Shares rose $6.98, or 9.8 percent, to $78.22.
The revision arrived as Dick’s reported first-quarter results that beat expectations for sales and earnings.
The change amounts to a 16 percent earnings reduction in fiscal 2022 EPS guidance at the mid-point of the updated range. The downward revision comes as several retailers, including Walmart and Target, tempered their guidance for the year due to inflationary and supply chain pressures.
“Like everyone else, we have been carefully monitoring the rapidly evolving macroeconomic environment and assessing our expectations based on our experience, running our business across economic cycles,” Hobart said on a conference call with analysts. “With this perspective, we believe it’s appropriate to be cautious and, therefore, we are lowering our outlook for the year. To be clear, we expect our performance will continue to meaningfully exceed 2019 levels, reflecting the strength of our core strategies and the changes we’ve made in our business over the past five years. Dick’s is the clear market leader, and we are well-positioned to extend our lead and build on our competitive advantages in the years ahead. We continue to closely watch the macro landscape and have the flexibility in our business to remain nimble.”
The updated outlook for fiscal 2022 calls for:
- EPS in the range of $7.95 to $10.15, which includes a minimum of $300 million of share repurchases. Previously, GAAP EPS was projected in the range of $9.96 to 11.13 against $13.87 a year ago and included a minimum of $200 million of share repurchases.
- Non-GAAP EPS in the range of $9.15 to 11.70. Previously, non-GAAP EPS was projected in the range of $11.70 to 13.10 against $15.70 in fiscal 2021. Both periods are adjusted for interest expense and share dilution relating to its convertible senior note.
- Comps in the range of negative 8 percent to negative 2 percent. Previously, same-store sales were projected to be in the range of negative 4 percent to flat.
- Capital expenditures are still expected in the range of $400 to 425 million on a gross basis and $340 to 365 million on a net basis. In fiscal 2021, capital expenditures were $308 million on a gross basis and $268 million on a net basis.
Asked to elaborate on what’s changed in the business to cause the outlook adjustment, Hobart said the retailer had a “very good Q1,” and the higher costs of freight, labor and product in the quarter were anticipated. However, the two factors that have changed since the start of the year are the state of the consumer and escalating expenses.
Hobard said, “The consumer is going through an awful lot right now. So, obviously, macroeconomic trends are challenging, inflation is putting pressure on the consumer at the gas pump and in the grocery store, we all know. And then there’s this geopolitical environment that is very, very challenging. At the same time, we see that the expenses of those three-line items——freight, labor and perhaps product input costs——-are accelerating more quickly than anticipated.”
She added, “And so we want to be appropriately cautious as we look forward to the year.”
Hobart stressed that Dick’s had not seen dramatic shifts in its business. She said, “I want to be very clear that we are not seeing any meaningful trends different from what we saw in Q1.”
She also said the quarter’s ending inventory, being up 40 percent, isn’t tied to softening demand. Hobart said Dick’s inventory composition remains “very healthy, and we are very pleased with it,” and it’s even still facing shortages in some areas. Hobart elaborated, “There’s been some disruption regarding when inventory is flowing in. But we had anticipated that certain categories like fitness and outdoor equipment would normalize this year. And they have normalized as we expected. We are still chasing products in certain categories, and our inventory is healthy. We are not anticipating any significant markdown risk.”
Finally, she said Dick’s is not seeing signs of an elevated promotional climate following healthy full-price selling seen over the pandemic. She said, “We do not see a change in the promotional environment. We will, obviously, continue to monitor that and we will be surgically addressing price changes as we absorb some of the cost increases. But the marketplace has not shifted dramatically in any meaningful way. We are just being appropriately cautious as we look toward a lot of things that are outside of our control when we look at the rest of the year.”
Probed about whether Dick’s was losing benefits from changed behaviors that had boosted sales over the pandemic, Hobart said that every category, except hunt, had “re-baselined meaningfully higher” versus pre-pandemic volume.
“That reflects the fact that the consumer is outdoors more. They are running, they are walking, they are playing golf,” said Hobart. “The pandemic-surging categories that we’ve all been talking about, and we expected to normalize, are fitness, outdoor equipment, including bikes, paddles and golf. And those three normalized as we expected them to, but we believe they all have long-term growth potential. So we are not changing our outlook on any aspect of our business. We think in these times, people need to get outside. They need to be active. They want to be with their families, and we are well-positioned to serve the needs of these athletes.”
First-Quarter Results Top Wall Street Estimates
In the quarter ended April 30, sales were down 7.5 percent to $2.7 billion but exceeded Wall Street’s consensus estimate of $2.63 billion.
Comparable store sales fell 8.4 percent against a gain of 117.1 percent a year ago. Transactions declined 6.4 percent and average ticket slipped 2 percent.
Net income declined 28.0 percent to $260.6 million, or $2.47 a share. On a non-GAAP basis, net income fell 29.0 percent to $260.6 million, or $2.85, surpassing Wall Street’s consensus estimate of $2.53.
Hobart said the sales decline reflected the anniversary of significant stimulus payments and anticipated sales normalization in certain categories. Versus the pre-COVID levels, sales were up 41 percent versus Q119 and sequentially accelerated from last quarter.
“These top-line results reinforce our strong conviction that the shift in consumer behavior over the past two years is structural,” said Hobart. “Consumers have made lasting lifestyle changes, with an increased focus on health and fitness and greater participation in sports and outdoor activities. Our business is squarely at the center of these secular trends, and the actions we have taken over the past five years to transform our company have given us significant competitive advantages across all aspects of our business.”
Gross margins declined 83 basis points to 36.47 percent. The decline was driven by 103 basis points increase in supply chain-related costs and a deleverage on fixed occupancy costs of 94 basis points from the sales decrease. Merchandise margins continued to improve, increasing 143 basis points.
Merchandise Margins Benefit From Differentiated Product Mix
Hobart said Dick’s margins continue to benefit from its increasingly differentiated product assortment and more sophisticated promotional strategies, describing those benefits as “not always appreciated about our transformation.”
“The content of the product that we carry today is very different from the products we carried five years ago,” said Hobart. “It’s higher heat and more narrowly distributed than what you’ll find in the market as a whole and, therefore, it is not as susceptible to promotion. In addition, the tools we have today to surgically adjust pricing are significantly more sophisticated than they were several years ago. With these fundamental changes, we are very confident that the majority of our merchandise margin rate expansion that we’ve driven over the past two years is sustainable.”
A favorable sales mix also supported merchandise margins.
SG&A expenses were 22.79 percent of sales and deleveraged 195 basis points primarily due to the decrease in sales. The increase in SG&A expense dollars is driven by investments in advertising and hourly wage rates.
Driven by higher sales and merchandise margin compared to pre-COVID levels, EBT (earnings before taxes) achieved a double-digit EBT margin of 12.29 percent. Hobart said the operating earnings margin and EPS were “significantly ahead of any pre-COVID first quarter in our history.”
Omnichannel Focus Pays Dividends
Also supporting Dick’s growth is its omnichannel platform that “features our stores as a hub,” according to Hobart. Over 90 percent of total sales were supported by stores, either via in-store purchases or ship from store, in-store pickup or curbside.
She added, “We also continue to invest in an enhanced service model and lean into highly engaging experiences to serve our athletes better and reinforce their loyalty. Our digital capabilities remain core to our omnichannel success, and we are continuing to prioritize investments in technology and data science.
In merchandising, Hobart said relationships with its key brands remain strong. In the Q&A session, she noted that the company’s partnership with Nike “is at an all-time high,” similar to other strategic partners. She added, “I think that’s a result, not just of a situational moment in time with certain partners but the fact that we have invested so much in our stores and our experience, such that brands who are rooted in sport want to showcase their product and their brand in our stores. So, across the board, we are getting access to higher heat and more pristine premier products that are high in consumer demand. And that’s a big part of our strategy, which has been driving our results.”
Among product categories, footwear in the quarter “did really well for all the reasons that we’ve been talking about, and inventory in that category is good. And, again, if we could chase more, we would chase more,” said Hobart.
Apparel faced more inventory challenges during the quarter. Hobart added, “We are planning to buy around anything that came in late, so it’s not a markdown risk for us, and we believe that back-to-school apparel should be getting better.”
Hobart added that Dick’s private-label push is particularly helping Dick’s provide more choice for customers. She stated, “For example, through DSG, our largest vertical brand, we offer high-quality, fashion-forward products at a tremendous value across men’s, women’s and youth. Our key lifestyle vertical brands, including CALIA and VRST, also resonate strongly with our athletes, and we continue to invest in and grow these brands.”
Finally, Hobart said Dick’s new concepts, including Dick’s House of Sport, Golf Galaxy Performance Center, Public Lands, and Going, Going, Gone!, “are delivering promising early results.”
The third House of Sport location that opened early in May in Minnetonka, MN is exceeding expectations., Hobart said, “We look forward to continuing to refine and grow these concepts while pulling key learnings into our core Dick’s and Golf Galaxy chains.”
Inventories Climb 40 Percent
Inventories were up 40.4 percent at the quarter’s end, reflecting restocking from low year-ago inventory levels and higher average unit retails (AUR).
Navdeep Gupt, CFO, said a better comparison is to the first quarter of 2019. Sales in the latest quarter were up 41 percent versus Q119 and inventory is up 32 percent against Q119.
Asked what gives Dick’s confidence, the back half would have too many inventories; Gupt said Dick’s has faith in the retailer’s buying and supply chain team that has been in chase mode for much of the pandemic. Gupt also said, “We are doing all of these internal evaluations, discussing different scenarios. And to me, the confidence that we have in our team is probably the biggest indicator of the overall confidence that we have in our inventory position.”
Hobart added, “Where we are right now, the inventory is not toxic. We don’t plan to create any level of risk with toxicity, and we can manage through and buy around any inventory we have. So this does not concern us.”
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