Dick's Sporting Goods Sees a Brighter 2018 Ahead

Dick's Sporting Goods (DKS 3.74%) announced earnings results this week that contained several encouraging signs for the business. While same-store sales still fell from year-ago levels, the retailer reduced its reliance on price cuts while slimming its inventory. Together, these trends suggest Dick's will generate higher earnings in 2018 than management had projected back in March.

Dick's by the numbers

Data source: Dick's financial filings. YOY = year over year.

What happened with Dick's this quarter?

Sales growth was powered by a rising store base which overcame same-store sales declines at Dick's existing locations. But the big surprise came from greater earnings growth than expected. 

Image source: Getty Images.

The key highlights of the quarter:

• Comparable-store sales fell by 0.9%, or 2.5% after adjusting for calendar differences between the two periods. That was consistent with management's recent outlook. The business was hurt by slower hunting and electronics sales in addition to a delayed spring selling season.
• E-commerce sales jumped 24% to mark a solid acceleration over the prior quarter's 9% boost.
• Gross profit margin edged down just slightly, falling to 29.3% of sales from 29.7% a year ago.
• Expenses expanded at a faster pace than revenue while pre-opening costs fell. Altogether, operating profit margin slipped to 4.6% of sales from 4.9%.
• Inventory levels dropped 4%.
• Lower tax expenses ensured that Dick's bottom line held steady as the company generated $60 million of net income. Aggressive spending on stock buybacks, meanwhile, produced a double-digit percentage increase in earnings on a per-share basis.

What management had to say

Executives said several positive trends combined to significantly shift Dick's operating momentum over the last few months. "Our strong first quarter earnings reflect improved execution against our merchandising strategy," CEO Edward Stack said in a press release, "which resulted in higher merchandise margins."

Executives credited fresh releases from suppliers like Nike and Under Armour for helping lift profit margins, too. "Product newness, strength in our private brands and a more refined assortment led to a much healthier business, with fewer promotions and cleaner inventory throughout the quarter," Stack explained.

Management also put the spotlight on their healthy e-commerce sales channel. "We are continuing to see the results of investments in our digital experience," Stack said, "and we will continue to invest as we build the best omni-channel experience for all athletes."

Looking forward

Those investments are still projected to hurt profitability this year, but not as much as previously feared. In fact, Dick's lifted its full-year earnings outlook to a range of $2.92 to $3.12 per share, up from the prior target of $2.80 to $3 per share.

The company didn't shift its revenue forecast, which still predicts a slight sales decrease this year following 2017's flat results. It's still early in the year, though, and so that target might inch higher after next quarter's numbers give executives a better reading on the business.

There's less concern about a potentially sharp profit drop, though. With its inventory position leaner today, and stacked with fresher merchandise, Dick's has a good shot at improving on last year's $3-per-share earnings haul even as it invests aggressively in an e-commerce business that's set to account for more than 20% of the broader business in 2018.