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Perspectives From Dick's Sporting Goods Management

By Asit Sharma – Jun 6, 2019 at 11:35AM

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Management discussed inventory levels, the company's evolving stance on its "hunt" merchandise category, and its new private-label apparel brand.

Sporting goods retail chain Dick's Sporting Goods (DKS 1.24%) has enjoyed a 16% stock price increase year to date as investors have welcomed its efforts to stabilize comparable-store sales. Year-over-year comps were flat in the company's most recent quarter, near the high end of management's guidance. To realize further share price gains, of course, Dick's will need to return to moderate revenue growth paced by even healthier comparable sales. During the company's fiscal first-quarter 2019 earnings conference call on May 29, CEO Ed Stack introduced three topics central to near-term top-line expansion. Below, we'll isolate Stack's quotes and discuss their significance within Dick's Sporting Goods' larger picture going forward.

Don't be alarmed by a jump in inventory

By design, we made strategic inventory investments into key growth categories as prior year inventory levels were running too lean. This resulted in our inventory increasing 16% at the end of the first quarter compared to the end of the same period last year.

Investors are rather quick to worry about rising inventory levels in companies that sell variable merchandise such as Dick's. Tastes in athletic apparel and sporting goods change frequently, and often, higher inventory at the end of a reporting period serves as an early indicator of a slowdown in sales. Thus, CEO Ed Stack preemptively pointed out in his prepared comments that this quarter's buildup, relative to the comparable period, is purposeful.

Later in the call, Stack explained that Dick's is eager to keep in-demand merchandise on the shelves in order to maximize sales opportunities. Management avoids overstocking items that might be "toxic" in a future quarter due to the tendency of consumer preferences to rapidly shift. Instead, the company wants to have ample inventory on hand of what Stack described as basic Nike and Adidas athletic apparel; in other words, core recurring items from major manufacturers.  

CFO Lee Belitsky also mentioned a benefit to keeping a slightly elevated level of inventory: Merchandise already in-house escapes any further tariffs the Trump administration has threatened to enact, from Chinese to Mexican goods.

Update on the hunt category

As expected, our comp decline in hunt lessened after we anniversaried our announcement at the end of February. However, hunt comps were still meaningfully negative throughout the remainder of the quarter as the hunt industry faces continuing headwinds. As previously announced, in light of these difficult industry trends, we are evaluating our strategy for this category across all banners. 

As my colleague Rich Duprey asserts in a recap of Dick's current quarter, the company isn't wavering from its decision last February to remove firearms from some of its stores and to also completely remove the hunt category from a sample of stores. Dick's banned assault-style weapons from its stores last year after it was revealed that the shooter in the Parkland, Florida, high school shooting had purchased a gun from one of the company's locations.

In March 2019, Dick's revealed that it was removing firearms completely from 125 of its 727 stores. As sales in an already-weakened hunt category have deteriorated due to the ire of some gun-owning customers over Dick's recent actions, the company has experimented with displacing hunt real estate altogether.

Since the third quarter of last year, the organization has removed the hunt category from 10 stores where it underperformed. Dick's has replaced merchandise at these locations with "a more compelling, localized assortment," and management reports higher comps and profit margins in these stores.

Within the set of 125 stores in which firearms will be completely nixed, management also intends to replace the hunt category with merchandise from other categories. Despite some initial pressure on comparable sales in recent quarters, Dick's management appears to be quite determined to diminish the presence of firearms throughout the chain, and it's possible that the decision may eventually result in higher overall sales.

A tennis player stands near the net on a clay court.

Image source: Getty Images.

New private-label lines will make Dick's more competitive

Additionally for back-to-school, we will round out our athletic assortment when we launch DSG, our new high-quality, value-oriented performance brand across men's, women's and kids athletic apparel. DSG will only be available at Dick's and will put us in a much stronger position to compete against other similar offerings in department stores and other sporting goods stores. We've been very pleased with the feedback we've received from initial focus groups and are excited for the upcoming launch.

Private-label brands can be extremely lucrative for retailers, but overly aggressive promotion of house labels can antagonize significant partners. In the quote above, Stack crystalizes the objectives of the company's new value brand, DSG. Specifically, the line is meant to fend off cheaper value-oriented labels popping up not only in athletic goods shops but in retail stores that cross over into athletic apparel -- the Kohl's department store chain, for example. 

During the call, Stack was asked about the potential for DSG to compete with Nike and Adidas offerings and thus return higher profits to the retailer. The CEO pointed out that Dick's is really looking for DSG to attract new, value-conscious customers who may have not frequented the chain in the past. Stack also emphasized that management was very pleased with both its Nike and Adidas businesses.

In reality, Dick's management probably won't mind if its higher-margin DSG brand cannibalizes partner brands to a small extent. However, major labels bring traffic into stores and play a significant role in company profits. Ultimately, there's a limit to which private-label brands can be allowed to flourish: Dick's major vendor partners also need to see quarterly growth on the company's shelves for their relationships with the chain to prosper.

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy.

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