Dick’s Sporting Goods reported plans to return to annual square footage growth, led by its House Of Sport concept, after reporting fourth-quarter results that easily surpassed Wall Street expectations, boosted by a 5.3 percent same-store gain.

Fourth-quarter EPS was below year-ago levels due to difficult comparisons as the retailer was up against two consecutive record years and the return of promotions in the marketplace. However, EPS was still “significantly ahead of any pre-COVID Q4 in our history,” said Lauren Hobart, president and CEO, on a call with analysts.

Dick’s 2023 guidance also easily exceeded Wall Street targets. In late-afternoon trading Tuesday, shares were up $13.50, or 10.2 percent, to $145.64. The stock began the year at $120.29, and its 52-week range is between $63.45 and $146.89.

Overall earnings and comps for the full year were down due to challenging comparisons but were significantly higher than results for the pre-pandemic 2019 year, demonstrating that the retailer’s business had significantly re-baselined at higher levels over the pandemic.

Outlining Dick’s progress, Hobart compared 2022 results to its pre-pandemic fiscal 2019 year ending January 28, 2020 as follows:

  • Sales increased 41 percent, or $3.6 billion;
  • Merchandise margin increased by more than 300 basis points;
  • Non-GAAP EBIT margin more than doubled; and
  • Non-GAAP EPS grew more than three times higher.

“Our strong performance and financial strength position us to increase the rate of investment in our business to fuel long-term growth opportunities and also return significant capital to shareholders,” said Hobart.

Demonstrating confidence in its bullish outlook, Dick’s hiked its annual dividend 105 percent to $4 per share, or $1 on a quarterly basis. Hobart said the dividend raise “clearly reflects our strong conviction in the structurally higher sales and earnings profile of our business and our ongoing focus on delivering shareholder value.”

Hobart said Dick’s consumers continue to embrace outdoor activities and healthier lifestyles coming out of the pandemic.

“We are seeing our consumer doing very, very well,” she told analysts. Hobart added that consumers are prioritizing categories like health, wellness, active lifestyle and team sports more than they did prior to the pandemic.

“I think people really have decided with whatever they have in their wallet, they’re prioritizing these categories,” Hobart said. “They’re coming to life more as necessities rather than discretionary.”

However, she also stressed the retailer’s significant earnings and sales progress over the last three years came from transforming “virtually every aspect of our business” since 2017.

Transformation Payback
The transformational changes include an increased focus on differentiated and on-trend products, including securing better allocation. 

Said Hobart, “Our ability to showcase an entire brand portfolio is highly valued by our strategic partners, and our relationships with key brands remain stronger than ever. We’re also developing relationships with new and emerging brands and, at the same time, have created powerhouse vertical brands that collectively represent the second largest brand in our company.”

Over the last three years, approximately 80 percent of Dick’s growth came from the sales in its “priority categories”—footwear, athletic apparel, team sports, and golf—where Dick’s believes it “gained considerable market share,” said Navdeep Gupta, EVP and CFO, on the analyst call.

At the store level, Dick’s invested in employee pay and training to elevate customer service levels. Hobart said, “We believe strongly that highly engaged teammates are critical to providing a great experience for our athletes, and our culture is one of our key competitive advantages.”

Finally, Dick’s believes it’s bringing a differentiated experience to its stores by adding HitTrax batting cages, Trackman golf simulators and premium, full-service footwear departments. Said Hobart, “These strategies, in combination with our personalized marketing engine and brand-building efforts, are working.”

Building on the retailer’s gains over the past two years, Hobart said Dick’s added seven million new “athletes,” Dick’s term for customers, during 2022 and reached record highs in its active athlete database in Q4. Hobart said, “Our new athletes continue to skew younger and more female, representing a great opportunity for future growth. Importantly, our Gold athletes, our most valuable cohort, hit a record high of over seven million people, equating to nearly 30 percent of our active Scorecard members. We see strong retention with our Gold athletes, and they continue to drive meaningful sales growth representing well over 40 percent of total sales.”

House of Sport Primed For Growth
To address growth opportunities, Dick’s plans to accelerate the expansion of its House of Sport concept with “as many as 75-to-100” new stores opening over the next few years.

Dick’s launched the concept in 2021 and operates three stores in Rochester, NY; Knoxville, TN; and Minnetonka, MN. The stores feature an outdoor turf field and running track that converts to an ice-skating rink in winter, an indoor 35-foot rock climbing wall, a tech-enhanced batting cage, golf-hitting bays, a putting green, and other sports-related experiences.

Hobart said that since launching House of Sport in 2021, the three locations exceeded expectations, have driven strong engagement with brand partners and delivered higher sales and profits on a per-square-foot basis.

Hobart credited the store’s concept to Ed Stack, Dick’s executive chairman and former long-time CEO.

“Dick’s House of Sport is redefining sports retail,” said Hobart. “It’s an experiential destination that was inspired by Ed as he challenged us to create the concept that if built across the street from Dick’s Sporting store, we would put that store out of business. It’s this way of thinking that drives us to continue to innovate and create market-leading disruption. House of Sport is an experience that fosters deep community involvement, goes well beyond traditional retail and has become a destination where athletes can fuel their passion.”

Over the next two years, around 20 additional House of Sport locations are expected to open, including downtown Boston and the chain’s current headquarters in Pittsburgh and former headquarters in Binghamton, NY. Said Hobart, “House of Sport will be a significant part of our future growth story.”

Field And Stream To Fully Close
To make way for House of Sport growth, Dick’s plans to exit the Field and Stream brand and convert its remaining 17 Field & Stream stores into House Of Sport locations or larger Dick’s Sporting Goods stores. Twelve Field & Stream stores were closed in the fourth quarter with pre-tax impairment charges totaling $30.1 million related to Field & Stream store assets.

For 2023, nine House of Sport stores are planned, of which eight are existing Dick’s Sporting Goods and Field and Stream store conversions, along with one relocation.

Hobart also noted that key learnings from the House of Sport were incorporated into core Dick’s locations. Later this year, a “next-generation, 50,000-square-foot” Dick’s Sporting Goods store will open in South Bend, IN, with numerous House of Sport elements incorporated into the store format.

Other Growth Drivers
Square footage growth will also come from new Golf Galaxy Performance Center locations and the conversion of temporary value chain stores, including Warehouse Sale and Going, Going, Gone! concepts to permanent sites.

Among other concepts, growth opportunities were also noted with Dick’s recently-launched Public Lands outdoor concept. Hobart also said that on February 22, Dick’s announced plans to acquire outdoor retailer Moosejaw from Walmart and described that purchase as a “real affirmation of our commitment to growth in the multibillion-dollar outdoor category.”

In technology, Hobart identified growth drivers from Dick’s online investments supporting personalization and encouraging customers to shop across channels. Hobart said, “We’re excited by the results these investments are generating and believe our capabilities are distinctive in our industry and provide a long-term competitive advantage.”

Hobart also called out the growth potential of Game Changer, the retailer’s scoring and statistics mobile app for youth sports, which grew at a five-year CAGR of 35 percent and remains profitable. Hobart said, “Every year, nearly six million games are covered on Game Changer, and athletes and their families engaged with the platform for over 280 million hours. To put this in perspective, more games are covered in a single spring month on Game Changer than have been played in the entire history of Major League Baseball.”

Campaign Relaunching Dick’s Sporting Goods
Finally, Dick’s will relaunch the brand during NCAA March Madness with a campaign “focused on the power of sports to change lives.” The campaign builds around its Sports Matter youth sports sponsorship program, and Dick’s’ will commit more than $5 million this year to fund 75 youth sports organizations. Said Hobart, “We believe it’s time to blend the inspiration and aspiration that’s always been a part of our brand marketing efforts with the raw power and emotion of our Sports Matter initiative.” Marketing campaigns this year will also celebrate Dick’s 75th anniversary.

Fourth-Quarter EPS and Sales Top Wall Street Targets
In the fourth quarter ended January 28, sales advanced 7.3 percent to $3.6 billion, topping Wall Street’s consensus estimate of $3.45 billion and representing the retailer’s largest sales quarter. When compared to the fourth quarter of 2019, sales jumped 37.9 percent.

Comparable store sales climbed 5.3 percent in Q4 on top of the 6.6 percent increase in the prior-year period, a 19.3 percent increase in Q420, and a 5.3 percent increase in Q419. The 5.3 percent year-over-year gain was driven by a 7.6 percent increase in transactions, partially offset by a 2.3 percent decline in average tickets. Footwear, athletic apparel, and team sports led the gains.

Net income fell 32 percent to $236 million, or $2.60 per share, for the fourth quarter, from $346 million, or $3.16, a year ago. On an adjusted basis, earnings declined 27 percent to $258 million, or $2.93, from $352 million, or $3.64, in the prior-year comparable quarter, and ahead of Wall Street’s consensus estimate of $2.88. In the fourth quarter of 2019, adjusted EPS was $1.32.

Gross margins declined 514 basis points year-over-year to 32.4 percent. The year-over-year decline was driven by a merchandise margin rate decline of 640 basis points, partially offset by lower supply chain costs.

“As planned during the holiday season, we provided our athletes with a series of compelling item-level deals,” said Gupta. “Additionally, we continue to address targeted inventory overages due to late-arriving spring product. As a result of these actions, our inventory is in great shape as we start 2023. We are taking in new receipts and could not be more excited about our spring assortment.”

Gupta noted that compared to Q419, gross margins are 209 basis points higher, driven by a differentiated assortment combined with a sophisticated and disciplined pricing strategy and a favorable product mix. Gupta said, “These are the same key contributors to our structurally higher margins that we have been emphasizing.”

On a non-GAAP or adjusted basis, SG&A expenses leveraged 48 basis points to 22.9 percent.

Non-GAAP EBIT was 9.74 percent of sales against 5.7 percent in the fourth quarter of 2019, reflecting the structurally higher sales, expanded merchandise margin and operating efficiencies compared to pre-COVID levels.

For the full year, revenues increased 0.6 percent to $12.37 billion. Comps were down 0.5 percent for the year in addition to a 27.4 percent increase in the prior year.

Net income fell 31 percent to $1.04 billion, or $10.78 per share, from $1,52 billion, or 13.87, a year ago. On an adjusted basis, earnings were also down 31 percent to $1.07 billion, or $12.04, from $1.54 billion, or $15.70, the prior year.

Outlook
For 2023, Dick’s forecast calls for EPS in the range of $12.90 to $13.80, which at the mid-point is up 11 percent versus 2022 or 5 percent on a 52-week comparable basis. Guidance was well above Wall Street’s consensus estimate of $12.03.

Year-over-year EPS gains are expected to reflect a 20 cents per share due to the 53rd week in the current year.

Comparable store sales are expected to be flat to positive 2.0 percent on a 52-week basis. Comps are expected to be stronger in the first half due to improved inventory availability.

First-quarter gross margin is expected to meaningfully improve versus Q4 but be modestly down year-over-year primarily due to lower merchandise margins, partially offset by improving freight expenses. Gross margins and merchandise margins are expected to improve sequentially throughout the year.

SG&A expenses are expected to deleverage this year primarily due to investments to fund its growth strategy.

At the midpoint, EBT margin in the year is expected to be approximately 11.7 percent, driven by an increase in gross margins due to expected improvement in merchandise margin and lower supply chain cost. Non-GAAP EBIT margin was 11.43 percent in 2022 and compared to 5.03 percent of net sales in FY19.

Said Hobart, “We will continue to create and define our future. And as the largest U.S. sporting goods retailer, we are well-positioned to extend our lead and continue gaining share in a fragmented $140 billion industry.”

Photo courtesy Dick’s House of Sport