By Eric Smith
When an analyst on Wednesday’s quarterly conference call asked Dick’s Sporting Goods CEO Ed Stack about how the company is getting along with gun makers, his reply was understated.
“We don’t have the best relationship with the firearms manufacturers right now,” he said.
The company’s recent policy of refusing to sell firearms resulted in plenty of PR fallout, including O.F. Mossberg & Sons Inc. announcing the company would stop selling products to Dick’s and its subsidiary Field & Stream; the National Shooting Sports Federation expelling the retailer; and scores of outraged customers calling for boycotts of Dick’s on social media.
But the backlash hasn’t affected the retail giant’s stock price or bottom line. Shares of the Pittsburgh, PA-based company were up 26 percent after the retailer easily beat Wall Street’s estimates for the first quarter ended May 5 through strength in other categories, including an especially solid performance in private label sales, which led to higher margins.
“Merchandise margin rate increased across the majority of our business categories,” Stack said. “This margin rate expansion is due to stronger innovation and newness from several of our key partners, as well as the higher penetration of our private brands. Our refined assortment led to a healthier business with fewer promotions. During the quarter, we started to see the benefits of many of our strategies and investments.”
Dick’s reported net income for the first quarter of $60.1 million, or 59 cents per diluted share, well above the consensus estimate of 45 cents and up slightly from adjusted year-ago results. The company’s net sales for Q1 increased 4.6 percent to $1.91 billion, ahead of Wall Street’s consensus target of $1.88 billion.
Adjusted for the calendar shift due to the 53rd week in 2017, consolidated same-store sales decreased 2.5 percent on a 13-week-to-13-week comparable basis. Based on an unshifted calendar, consolidated same-store sales for the first quarter decreased 0.9 percent. Wall Street, on average, was expecting a 1.5 percent decline
Consolidated same-store sales were impacted by a continued deceleration in hunt and electronics sales, as well as colder spring weather, which resulted in a delayed start to key outdoor sports and activities.
Surprisingly, the topic of the new firearms policy didn’t dominate the conversation, though the company did see an “accelerated decline in an already challenged category [hunting],” Stack said.
Other than that, the fallout of no longer selling guns has been minimal. Stack noted that while Mossberg won’t sell to Dick’s on a direct basis, the retailer can still buy the supplier’s product from a distributor.
He then downplayed the NSSF expulsion, claiming, “We didn’t have a whole lot to do with them. They primarily run the Shot Show. We would go to the Shot Show. So we don’t go to the Shot Show now. It’s really not that big of a deal.”
As far as customer reaction, the new policy—which was announced in February following the Parkland, FL, shooting— has had the opposite effect on foot traffic in stores and both in-store and online revenue. In other words, the supporters have so far outspent whatever money the detractors took away.
“There’s been a number of people who have started shopping us or they’re going to shop us more because of the policy,” Stack said. “So I guess overall I would say there’s definitely been some benefit of people who have joined us, so to speak, because of the policy.”
Instead of firearms, much of the talk Wednesday focused on the company’s private label performance, specifically the Calia line of clothing.
“We’ve expanded our Calia collection to new categories and given it premium space in our stores,” Stack said. “In the three short years since its launch, Calia has grown to be our No. 3 private brand in our portfolio and the No. 2 brand in women’s athletic apparel behind only Nike.”
Stack said the Calia brand and other private brands will continue to garner more premium space in stores because of their success.
Dick’s also made progress in digital initiatives with e-commerce business increasing 24 percent. As a percent of total net sales, Dick’s online business increased to approximately 11 percent compared to approximately 9 percent in the same period last year.
“Our technology investments are continuing to show positive results,” Stack said. “We are now more than a year past the launch of our proprietary e-commerce platform and our online customer experiences continue to improve. As we anniversary the launch of the website last year, we are very pleased with our 24 percent e-commerce growth of this past quarter.”
Those investments caught the eye of analysts like Stifel’s Jim Duffy, who wrote in a note to investors: “FY1Q results were better than feared, helped by the e-commerce acceleration (+24 percent y/y vs. our estimate for +15 percent), merchandise margin improvement and the calendar shift. Estimates go higher reflecting more optimistic view on e-commerce, merchandise margin, share repurchases in 1Q and flow-through of the 1Q tax rate benefit (CY18 $2.90 to $3.07).”
However, earnings progress remains a question for the company: “While appreciative of progress, structural challenges to traffic, retail only comps are still firmly in negative territory and margin headwinds from mix shift to e-commerce keep us guarded on capacity for earnings progress, and we remain comfortable with our hold rating.”
The strong quarter drove Dick’s to raise guidance for 2018. The company anticipates earnings per share in the range of $2.92 to 3.12, compared to the previous range of $2.80 to $3. Consolidated same-store sales are still expected to be in the range of flat to a low single-digit decline on a 52-week to 52-week comparative basis, compared to a decline of 0.3 percent in 2017.
And the company expects to open 19 new Dick’s Sporting Goods stores and relocate four Dick’s Sporting Goods stores in 2018. The company does not expect to open any new Field & Stream or Golf Galaxy stores in 2018.
In 2018, the company anticipates net capital expenditures to be approximately $250 million. In 2017, net capital expenditures were $373 million.
Photo courtesy Dick’s Sporting Goods