For the analyst community, Dick’s Sporting Goods’ issuance of a poor outlook for 2018 indicates that the industry’s return to healthy, full-price selling may take much longer than expected.
The major news from the quarter call was Dick’s officials providing initial guidance for 2018 that called for continued gross margin “pressure” to weigh on results. Same-store sales are projected to be flat in 2018 and EPS to decline “as much as 20 percent” due to the gross margin pressures as well as investments in a number of areas, specifically e-commerce, technology and payroll at the store level, Dick’s Team Sports HQ and private-label brands.
Prior to the 2018 guidance, analysts were expecting Dick’s 2018 earnings to decline 2 percent on average.
The cautious 2018 outlook came while the company more encouragingly reported a down but better-than-projected third quarter and inferred that its guidance wouldn’t change for the fourth quarter.
Gross margins eroded 370 basis points in the third quarter in part because Dick’s planned to promote heavily to maintain and build market share in the current promotional retail climate. Dick’s officials largely blamed a lack of innovation in the marketplace and overly-distributed product for its challenges.
At Cowen & Co., John Kernan kept his “Market Perform” rating but lowered his price target to $26 from $28.
On the positive side, the analyst highlighted in a note that Dick’s remains on its plan to generate sales of $1 billion from its private brands in 2017 and believes it can double that figure over time. The lineup now includes Calia, Field & Stream, Top Flite, Walter Hagen and Second Skin, and officials indicated that two new private label brands – one an athletic brand and the other an outdoor brand – will arrive in 2018. Kernan also noted that Dick’s officials in the past have indicated that private label brands generate a margin rate 600 to 800 basis points higher than the brands they replace.
But Kernan reduced his price target because he sees “little room for margin improvement or future growth until vendors 1) shrink inventory, raise AURs; 2) increase innovation; or 3) eCom profitability improves.”
Kernan also noted that athletic footwear only comped up low-single digits in the third quarter for Dick’s despite the expansion of full-service footwear decks over the last year. Other concerns for Kernan included SG&A likely remaining “elevated” due to the strategic investments and Q4 gross margin guidance not appearing “conservative” given the margin pressures seen in the third quarter.
Finally, Kernan sees risks to estimates for Foot Locker and Under Armour through 2018 as Dick’s third-quarter gross margin decline “indicates pressure in wholesale channel to produce SSS (same-store sales) growth without massive promotions.”
At Stifel & Co., Jim Duffy reduced his price target to $25 from $28 and kept his “Hold” rating on the stock.
Duffy said in a note that the above-plan third quarter provided “evidence that DKS is successfully capturing market share at the expense of margin near-term.” He also called Dick’s “the best capitalized and best operator in the aggressively capitalized North American sporting goods market.”
He added, however, that while the goal of pushing for market share expansion by staying aggressive on promotions is “rational,” it’s “likely to pressure earnings power for multiple years.”
Duffy also said that the “magnitude of the earnings impact” on 2018 earnings from the margin pressures was “surprising” and “visibility is poor” that earnings will bounce back in 2019.
“The FY18 EPS decrease sets a lower starting point for investors to build constructive earnings and cash flow projections,” wrote Duffy. “Without evidence of stabilizing comp sales, we are challenged to justify an upside case from current levels.”
At Susquehanna Financial Group, Sam Poser similarly lowered his price target on Dick’s from $27.00 to $25.00 and kept a “Neutral” rating on its shares.
Poser wrote in a note to clients that Dick’s faces “potential brand damage from sustained periods of promotional activity.” Moreover, he believes the chain’s focus on creating a strong price/value relationship, elevating the in-store experience, improving assortments, and enhancing omni-channel efficiencies “may not be enough to restore healthy” same-store sales and margin trends.
Indeed, he believes management should be shifting investments more aggressively toward brand-building messages such as the “Sports make people better” mantra that guides its Sports Matter initiative in order to establish an emotional connection with customers.
“Far too many multi-line retailers who have not established emotional connections with their customers continue to struggle,” Poser wrote. “The clock is ticking. The longer DKS continues to react to promo activity in the marketplace without establishing such connections, the more the Dick’s brand will be damaged. We are hopeful that DKS’ team will sharpen & amplify its brand messaging & customer engagement, but we see few signs that such will occur to the degree needed.”
Shares of Dick’s eased 73 cents to $25.59 on Tuesday after results came out. They’ve since recovered and closed Thursday at $27.97.
Photo courtesy Dick’s Sporting Goods