Whether Dicks Sporting Goods Inc (NYSE:DKS) had a good second quarter of 2017 is largely a matter of perspective. Sales as well as profits were up on a year-over-year basis, but Tuesday’s 20%-plus plunge in DKS stock makes it clear the market is less than thrilled with the revenue and earnings miss.
Perhaps more alarming than anything, however, is the practically non-existent same-store sales growth for Q2 and the impending markdowns Dick’s says it will be implementing during the latter half of this year.
The echoes of bad news from related companies like Under Armour Inc (NYSE:UAA) and bankruptcies of rival sporting goods retailers like Sports Authority and Sports Chalet (Dick’s Sporting Goods doesn’t appear to have captured any of either’s customers) still are ringing in investors’ ears.
It might be time for owners of DKS stock to throw in the towel.
Dick’s Sporting Goods Earnings Recap
For the quarter ending in July, Dick’s Sporting Goods turned $2.157 billion worth of sales into an operating profit of 96 cents per share. That top line was up 9.6% compared to the year-ago tally, and the bottom line was considerably stronger than the 82 cents per share of DKS stock produced in Q2 of 2016. Problem is, the pros were calling for a profit of $1 per share and revenue of $2.161 billion.
The killer: Same-store sales were only up 0.1%, falling well short of the company’s own forecast for same-store sales growth of between 2% and 3% for fiscal Q2. Almost all of the revenue and earnings growth stemmed from the addition of a few dozen new stores.
Hunting goods and athletic apparel were weak links, while the company did well with footwear and golf. Overall, though, the strong areas didn’t satisfactorily offset the sore spots, leading CEO Edward W. Stack to explain to DKS stock owners:
“By design, we will be more promotional and increase our marketing efforts for the remainder of the year, as we will aggressively protect our market share. We have updated our outlook to reflect these investments. We continue to believe retail disruption creates opportunities for us as we look long-term.”
Translation: Look for margins to shrink as the year progresses.
To that end, Dick’s updated its full-year profit guidance to a range of between $2.80 and $3 per share, coming up well short of the $3.64 per share analysts had been modeling.
Uphill Battle
To its credit, Dick’s mustered 19% growth in its second quarter online sales. E-commerce accounted for 9.2% of last quarter’s revenue, versus only 8.5% of Q2 2016’s top line.
In light of the absence of Sports Authority and other sports-centric retailers, though, Dick’s Sporting Goods just isn’t winning as much business as it should be, offline or otherwise.
The 800 -ound gorilla in the room is Amazon.com, Inc. (NASDAQ:AMZN). It always has been a threat and a problem, but the e-commerce giant’s recent more concerted effort to sell apparel at its site is paying off. Nike Inc (NYSE:NKE) is now an official Amazon seller, and Under Armour — though not an official Amazon merchant — has seen its goods increasingly listed at Amazon.com as well.
It’s all part of a deliberate plan from Amazon to expand its apparel reach. And it’s an expansion Dick’s may never be able to abate. Never even mind the slowing growth of the athleisure market. SW Retail Advisors’ Stacey Widlitz opined after the news:
“Dick’s is another example of Amazon becoming the new middleman… [the apparel and accessories] specialty space is no different than a department store when your brands decide to wave the red flag and sell on Amazon. Here we go down the gross margin rabbit hole just in time for the holidays.”
Bottom Line on DKS Stock
Sometimes an old business model can up updated, adapted for a new landscape. Other times, it can’t … at least not meaningfully enough to matter.
The current demise of Dick’s Sporting Goods looks to be a result of the latter, with that headwind being augmented by a saturated market at a point in time when the growth of interest in fitness appears to be slowing. A gun-friendly President has also deflated purchases of firearms, with no decided-anti-gun candidate on the horizon.
That’s not to say Dick’s Sporting Goods is going away altogether. It is to say, however, it’s very tough to find any good reasons to own DKS stock right now.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow James on Twitter.
