A ban on sales of certain rifles at Dick's Sporting Goods (NYSE:DKS) backfired as gun enthusiasts continue to take their business elsewhere, both for gun and other outdoor gear. The impact of their absence is noticeable

The hunting season is in full swing, and Dick's says gun sales in the third and fourth quarters are twice as large as they are in the first and second quarters. Because Dick's was eliminating the hunting department from 10 stores while considering whether to remove it from more locations, investors should expect the sporting goods chain to issue a very difficult fourth-quarter earnings report.

Man firing a hunting shotgun

Image source: Getty Images.

Hurt by the recoil

Following the Parkland school shooting in Florida last year, Dick's Sporting Goods took a number of initiatives to diminish its participation in the firearms business. It stopped selling modern sporting rifles (MSRs) at all of its Field & Stream stores (it had previously stopped selling them at its namesake stores after the Sandy Hook school shooting in 2012) and destroyed any of the remaining MSRs in its inventory. The chain also raised the minimum age to purchase any firearm from 18 to 21; stopped selling high-capacity magazines; and hired lobbyists to actively push for new, strict gun-control laws in Congress.

The actions created an immediate backlash as gun owners stopped shopping its stores. Third-quarter adjusted comparable-store sales fell 3.9% year over year, with the hunting category responsible for approximately 255 basis points of the decline. Unadjusted sales were down 6.1%, and Dick's forecast that full-year comps would be down 3% to 4%, versus the 0.3% decline in 2017.

And it wasn't just a drop in firearms sales that caused the retailer's problems. Electronics like those popular with shooting sports saw steep drops in sales, indicating its problems extended beyond the narrow confines of guns. The persistent problems at Under Armour also weighed on the retailer.

But the sporting goods store will soon be lapping its controversial firearms decisions, and it believes the rest of its business is doing well enough that when the gun issue is behind it, performance will look a lot better.

Check out the latest earnings call transcript for Dick's Sporting Goods.

Trying on new business for size

In the stores where it was eliminating hunting items, Dick's is adding more floor space for other areas that should have a better chance of growing sales, such as baseball equipment, licensed products, and outerwear.

CEO Ed Stack told analysts that the chain is picking up market share in a number of categories, including golf, so that "We're pretty enthusiastic going forward."

Even in areas like apparel where Under Armour has been an albatross around its neck, CFO Lee Belitsky says Dick's Sporting Goods is holding its own with the clothing business, which was up by mid-single digits in the third quarter. That probably explains why the retailer is launching more private-label clothing lines. Its Calia brand has been performing well for some time and last quarter it rolled out Alpine Design, which it maintains is off to a fast start.

 Stack, though, wishes some brands weren't also becoming competitors by opening up their own stores, since they have historically pushed sales to Dick's online store and they share information. However, he also believes concerns about them stealing business is overblown and contends there remains "a real partnership" with the vast majority of the brands doing so.

Because firearms carry lower profit margins than other sporting goods and private-label clothing, Dick's bottom line should eventually expand as these new lines fill out.

Firearms still loom large

Despite these bright spots, the fourth quarter will continue to be overshadowed by its actions on firearms and the response to them. The chain is also diverting a lot of its capital expenditures away from store openings and toward the digital space. It had a rough rollout of its revamped online site last year and is looking to avoid a repeat of the experience.

It's likely this quarter is going to be otherwise bleak, which may help explain why Dick's Sporting Goods hiked its dividend 22% for the period, raising the quarterly payout to $0.275 per share, or $1.10 for the year. 

That should be a salve to investors after the current quarter, and business ought to pick up afterward and provide better opportunities and better margin expansion. Investors, though, will have a clearer sense of how the retailer performs without firearms in the mix once it laps the gun ban.