Dick’s Sporting Goods’ third-quarter earnings declined due to aggressive markdowns on apparel but came in well above Wall Street targets as sales remained strong. The sporting goods giant also noted that results remain significantly above 2019 levels while lifting its guidance for the second straight quarter.
In mid-afternoon trading, shares of Dick’s were up $8.70, or 8.1 percent, to $115.64. The has now recovered back to the levels it started 2022 at after sliding as low as $71.24 in May after a profit warning.
“Our Q3 results demonstrate the continued success and strength of our business based on our transformational journey and the foundational improvements we’ve made over the past five years,” said Lauren Hobart, president and CEO, on a call with analysts. “The strategies are working and are clearly resonating with our athletes. Consumers continue to face macroeconomic uncertainties. Our athletes have held up very well as we continue to offer them a compelling and differentiated assortment as well as a best-in-class omni-channel experience.”
Dick’s, according to Hobart, saw three trends develop in the quarter: more consumers shopping the chain, more frequent purchases, and more spend per trip versus the prior year. She added, “The industry has strong momentum given a lasting shift in consumer behavior. Our differentiated assortment, elevated service standards and best-in-class channel athlete experience are setting us apart in the marketplace.”
Hobart further added that Dick’s benefited from improved in-stock positions versus the prior year. She said, “We were back in stock on key items. This enabled us to deliver a very strong back-to-school season and meet robust consumer demand.”
In the quarter, sales improved 7.7 percent versus the third quarter of 2021 to $3.0 billion, topping Wall Street’s consensus estimate of $2.7 billion. Sales surged 50.8 percent versus the third quarter of 2019.
Comparable store sales increased 6.5 percent on top of a 12.8 percent increase in the third quarter of 2021, a 23.2 percent increase in the third quarter of 2020 and a 6.0 percent gain in the third quarter of 2019.
The comp gain was driven by a 3.7 percent increase in transactions and a 2.8 percent increase in average ticket.
Hobart said the increase in average ticket in part reflected inflationary pressures as some costs were offset by higher prices. She added, “There was also a shift in terms of the mix that we provide to consumers and some premiumization of what people are buying. Consumers are absolutely signaling that a healthy active outdoor lifestyle is important to them and they are buying what they’re considering discretionary items to keep that lifestyle going.”
Hobart added that Dick’s core categories, team sports, apparel, and footwear, are all “key back-to-school categories, our top categories and they performed extremely well” during the quarter. She said many categories continue to see the benefit of changed behaviors during the pandemic. She added, “If you look across every single one of our key categories, everything except hunt, which is not a key category anymore, we have meaningfully re-baselined versus pre-Covid levels. We see no reason why long-term, we should not be able to continue to grow from this level.”
Gross margins declined 423 basis points to 34.2 percent of sales but were up 463 basis points over the third quarter of 2019.
As highlighted in its second-quarter conference call, merchandise margins were expected to be impacted by markdowns to clear late-arriving spring products, particularly in apparel. Merchandise margins were down 438 basis points year over year.
Navdeep Gupta, EVP and CFO, said on the call that Dick’s focused on clearing the excess apparel inventory at its two value concepts, Going, Going, Gone! and Dick’s Sporting Goods Warehouse Sale. The inventory was liquidated at a rate “significantly better than what we used to have in 2019.” Some clearance items were also sold online. Most of the planned clearance items have been liquidated. Added Gupta, “We intend to continue addressing this overage in Q4 in order to start ’23 clean.”
Compared to 2019, Dick’s merchandise margin rate is 141 basis points higher, attributed to its transformation that includes a more differentiated assortment, the addition of more-sophisticated and disciplined pricing strategies, and a more favorable product mix.
Hobart said, “Importantly, our merchandise margin remains elevated compared to 2019. And looking ahead, we continue to be very confident that our merchandise margin will remain meaningfully higher than pre-COVID levels on an annual basis.”
SG&A expenses increased 7.6 percent to $679.7 million but were down slightly as a percent of sales to 22.97 from 23.0 percent due to sales leverage. The increased expenses were due to investments in hourly wage rates, talent and technology.
EBIT (earnings before taxes) were $304.1 million or 10.3 percent of sales, down from $407.8 million, or 14.8 percent, a year ago, but up five times from an adjusted EBIT of $59.9 million, or 3.1 percent, in Q319. Hobart noted that the EBIT margin of 10.3 percent was over three times the retailer’s 2019 rate on a non-GAAP basis. She said, “This was driven by our structurally higher sales, expanded merchandise margin and greater operating efficiency.”
Net earnings declined 27.8 percent to $228.5 million, or $2.45 a share, from $316.5 million, or 2.78, a year ago. Reflecting shares distributed as part of an exchange of convertible senior notes, non-GAPP EPS in the quarter was $2.60, well above Wall Street’s consensus estimate of $2.24.
Inventory levels increased 35 percent year over year, in part reflecting lean year-ago inventory levels due to shortages caused by supply chain issues at the time. Compared to the third quarter of 2019, the 51 percent increase in sales was well ahead the approximately 31 percent increase in inventory. Hobart said, “Our inventory is healthy and well positioned. We’re excited about the assortment that we have in place for the holiday season.”
Dick’s now expects EPS in the range of $10.50 to $11.10, up from a range of $8.85 to $10.55 given when second-quarter results came out. Excluding the impact of the share settlement from the convertible senior notes exchange, adjusted EPS is now expected in the range of $11.50 to 12.10, down from $10.00 to 12.00 previously.
Comparable store sales are now expected to be negative 3.0 percent to negative 1.5 percent compared with prior guidance calling for sales in the range of negative 6 percent to negative 2 percent.
When reporting first-quarter results, Dick’s had downwardly revised its sales and profit forecasts due to persistent inflation in the U.S. economy and signs of a broader slowdown of consumer demand. With two-quarters of successive upgrades, guidance is close to the outlook provided at the year’s start., When Dick’s reported fourth-quarter results at the start of the year, guidance had called for reported EPS in the range of $9.96 to $11.13, adjusted EPS in the range of $11.70 to $13.10; and comparable-store sales in the range of negative 4 percent to flat.
The implied fourth-quarter EPS range is between $2.37 and 2.97, in line with the consensus target of $2.68. Dick’s officials said the conservative fourth-quarter guidance reflects uncertainty about the economy and not any signs of slowing momentum at the retailer. Gupta said, “We are very confident about the core aspects of the business as you think about apparel, team sports and even the outdoor category. So we are appropriately being cautious about the macroeconomic outlook. But overall we are very confident about the sales expectations on a long-term basis.”
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