Dick’s Sporting Goods Inc.’s stock took a beating on Wednesday, after the retailer missed sales estimates for the second quarter as it pulled back from some struggling, low-margin businesses and suffered a big fall in sales of a key brand.
The company DKS, -2.76% said sales of Under Armour Inc. products showed “significant declines” in the quarter, because that company has opted to expand its distribution. Under Armour UA, -1.53% is now offering its goods at department store chains, including Kohl’s Inc. KSS, -1.88%
Dick’s beat consensus EPS numbers by 14 cents, but same-store sales fell 4%, far more than the 0.6% FactSet consensus, while net sales of $2.177 billion lagged behind the $2.237 billion FactSet consensus.
Quo Vadis Capital said the numbers reveal “serious secular challenges” and highlighted two key issues.
“First, e-commerce competition is a drain on traffic and is creating incremental margin and pricing pressure,” said analyst John Zolidis, who is president of the research firm. “Second, and more significantly in our opinion, sporting goods is a business where brands are very important and key vendors are developing direct-to-consumer capabilities to bypass retail partners altogether.”
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Dick’s Chief Executive Edward Stack said sales were “impacted by the strategic decisions we made regarding the slow growth, low margin hunt and electronics businesses, which accounted for nearly half of our comp decline.”
On a conference call with analysts, Stack said the hunt and electronics businesses have operating margins that are about 1,700 basis points lower than the company average, meaning it is losing sales, but not profit.
Outdoor apparel and fitness equipment sales held up, said Chief Financial Officer Lee Belitsky, while license sales benefited from the World Cup soccer tournament and athletic footwear and golf performed well.
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Stack fielded multiple questions about Under Armour but said he is confident that sales will pick up again next year.
“We’re in the process of replacing that business and also looking at how we can grow the Under Armour business going forward, and we’re pretty excited about their pipeline beginning in 2019,” he said, according to a FactSet transcript.
He later said the company will have an exclusive product tied to Dwyane “The Rock” Johnson, the former wrestler and now film and TV star, whose Project Rock 1 shoes designed by Under Armour sold out in 30 minutes in May.
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“He’s a hot commodity right now. Everybody loves him. This is one of the areas that this is exclusive to us that we’ll be expanding,” Stack told analysts.
Dick’s is also upbeat about Under Armour’s HOVR shoe, a line of “zero-gravity” running shoes.
“And we’re excited about the products that will be put in more of a premium authentic athletic environment as opposed to more of a discount midtier distribution,” he said.
Stack also reminded analysts that the company had raised its full-year EPS guidance for the second time, a sign it was excited about its business going forward.
The company is now expecting EPS to range from $3.02 to $3.20, up from a prior range of $2.92 to $3.12. But full-year same-store sales are expected to fall 3% to 4%, far more than the FactSet consensus which calls for a decline of just 0.8%.
Susquehanna analyst Sam Poser said the results were not as bad as the stock price move suggested.
“While we recognize that the same-store sales missed expectations, DKS appears to be managing its transformation to a more focused higher margin business well,” he wrote in a note. “We recommend buying the stock on its current weakness.”
Dick’s shares were last down 3.6% but have gained 22% in 2018, while the S&P 500 SPX, +0.52% has gained 9% and the Dow Jones Industrial Average DJIA, +0.22% has gained 6%. Under Armour shares fell 1.1%.
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