Sports retailer Dick's Sporting Goods (DKS 0.09%) released earnings in mid-August, and although sales were up a respectable 9.6%, the reduced outlook for the rest of the year apparently spooked investors as the stock dropped more than 20% that day.
Dick's lowered its full-year same-store sales guidance to be flat to negative from its earlier expectation of 1% to 3% growth. While Nike (NKE 0.31%) and Under Armour (UA 0.48%) (UAA 0.61%) are Dick's biggest suppliers, I'm not worried about them.
Image source: Dick's Sporting Goods
Dick's same-store sales weakening
Same-store sales (aka comps) measure sales at stores that have been open at least a year and at Dick's include its e-commerce sales. It's a metric that lets investors see how a retailer is doing without taking into account growth from new locations. Dick's had a pretty good holiday season last year, putting up 5% comps, which included e-commerce growing at 27%. But the table below shows how the company's same-store sales numbers are deteriorating.
| Metric/Segment | Q4 2016 | Q1 2017 | Q2 2017 | Full-Year 2017 Projection |
|---|---|---|---|---|
| Same-store sales* | 5% | 2.4% | 0.1% | Flat to low-single-digit negative |
|
E-commerce* |
27% | 11% | 19% | Not available |
*Year-over-year growth.
It's important to note that Dick's includes its e-commerce business in its same-store sales numbers. Dick's e-commerce sales have been growing in the double digits, and when you subtract this out, it makes the story at the brick-and-mortar stores even worse. During the quarterly conference call with analysts, CEO Ed Stack said this about the retail environment and Dick's suppliers:
The retail market is currently in flux. The environment is highly competitive and dynamic. ... Vendor distribution strategies have changed, and pricing in the marketplace has become unpredictable and at times, irrational.
Stack went on say the company would "engage" in this "battle" and become more "promotional and competitive."
Nike has lots of irons in the fire
Will Nike be impacted by a slump in Dick's sales? The answer is a solid no. Nike is Dick's No. 1 vendor, coming in at 20% of the company's 2016 purchasing dollars (see pie chart below). On the flip side, Nike doesn't have any one customer bringing in more than 10% of its revenue, so the company isn't required to report details of its customer base. Last year Nike racked up $34 billion in revenue, so even if you assume 20% of Dick's revenue went to Nike, it would only account for less than 5% of the sneaker giant's top line. It seems that Dick's needs Nike more than Nike needs Dick's.
'Charts by author. Data from companies' most recent annual reports.
Note: The data for the bar chart is from the companies' most recently completed fiscal year. For Dick's and Under Armour, the fiscal year ended 12/31/2016, for Nike the fiscal year ended 5/31/2017.
Reason No. 2 why this doesn't matter is that Nike isn't sitting idly by while its brick-and-mortar retail partners take it on the chin. The company has built out a significant direct-to-consumer business of its own. Just looking at Nike's direct-to-consumer revenue from its most recent annual report, it has become larger than Dick's in overall revenue. Nike has pressed on the accelerator for its direct-to-consumer business by announcing a "consumer direct offense" initiative that aims to accelerate innovation and deepen one-on-one connections with customers. The effort focuses on 12 key cities in 10 countries that are expected to fuel 80% of the company's growth through 2020.
The last reason why Dick's is small potatoes for Nike is that Dick's is a U.S. business only, whereas the majority of Nike's revenue and revenue growth comes from its international locations. This is not the case, however, with Dick's second-largest supplier -- Under Armour.
Under Armour relies more on Dick's
Will Under Armour be impacted if Dick's projection of a low-single-digit decline in comps happens? The answer is probably not. While Under Armour is 12% of Dick's purchases, Dick's accounted for 10% of the company's revenue is 2016. It seems the companies have a mutual dependency, although it is still small in the grand scheme of things.
Under Armour is significantly dependent on its domestic wholesale partners, with only roughly 15% of net revenues coming from international segments in 2016. The company this year brought on Kohl's as a retail partner and while the company hasn't said much of substance about the impact of the Kohl's partnership, its 1,200 retail outlets across the U.S. give the company exposure to a consumer who might not think to shop at a Dick's for holiday gifts, so that potentially broadens its customer base.
Under Armour is building a substantial direct-to-consumer (DTC) business of its own, too. While the size of the company's $1.5 billion DTC business is small compared to Nike's and Dick's, it accounted for 35% of the revenue in the most recent quarter and put up healthy 20% year-over-year growth.
In the Dick's earnings call, Stack provided an intriguing description of the state of the sports retail environment.
I think it's just the perfect storm right now in retail, and I think sporting goods is in the center of it right now. There'll be further consolidation. ... We think it will be great on the back side, but it's going to be painful for a while.
While Dick's will be suffering, Nike and Under Armour have a solid "plan B."
