Shares of Dick's Sporting Goods (NYSE:DKS) were down sharply after announcing second quarter 2017 results yesterday. After last year's sports merchandiser meltdown that saw the demise of Sports Authority and other competitors, investor optimism in Dick's prospects going forward is declining.
Q2 by the numbers
Dick's sales were up 9.6% year-over-year to $2.2 billion. Earnings per share came in at $1.03, matching the high end of guidance provided in the first quarter for a range of $0.98 to $1.03. That compares to earnings-per-share of $0.82 in the second quarter of 2016, a 26% increase.
Not too shabby, but the big news driving investors' reactions were same-store sales and a revision to the outlook for the rest of 2017. Same-store sales growth fell short at just 0.1% compared to management's expectations for 2% to 3%. The meager increase came from digital sales, which were up 19% from 2016.
For the full-year, earnings are expected to come in at $2.85 to $3.05, creating a bargain price-to-earnings ratio of 9.4 after the stock shed 23% and assuming the low end of guidance. The problem, though, is that guidance is a downgrade from the previously stated $3.59 to $3.69 per share. Why the about-face?
A roadmap for the rest of the year
CEO Ed Stack cited a difficult retail environment during the quarter, with hunting and athletic apparel under pressure. The company's online selling efforts are yielding results, but there is still the need to up the ante even after last year's big shakedown in the sporting goods industry. Stack explained:
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.
Stack further explained that based on consumer research, the perception is that Dick's Sporting Goods is not competitive on price. Thus, a best price guarantee program that will honor a cheaper competitor's pricing is being launched.
Apparel sales, which have benefited in recent years from the "athleisure" trend are also under pressure as more companies enter the space and affect pricing. Even though it was stated that the company's private label apparel was up 7% year-over-year, Dick's expects to up its promotions in that category as well.
Even against a difficult retail industry backdrop, management believes opening new physical stores is still part of the overall strategy. Thirteen new stores were opened in the second quarter, bringing the total count to 704. Another 15 are in the works for the third quarter, which includes the conversion of an old Sports Authority location. Six of the company's Field & Stream stores are expected to open up adjacent to Dick's Sporting Goods stores as well.
All of these investments are adding up to the steep drop in expected profits compared to guidance from three months ago. It's worth noting, though, that full-year 2016 earnings per share were $2.56, so even the reduced outlook is still an 8% gain at the low end of expectations.
But the real concern is the risk of a prolonged period of reduced profits from discounting and continued weakness in same-store sales. In subsequent quarters, investors will need to see some signs that foot traffic is picking up in response to the new price matching program and sales initiatives. If not, Dick's stock may still have a ways to fall before bottoming out.