Dick's Sporting Goods (DKS -0.07%) has flexed its financial muscle to acquire inventory while the worldwide supply chain is in disarray. Now, its inventory levels are at an all-time high, and a slowing economy could spell disaster for the sports retailer.
Too much of a good thing
As people returned to basketball courts and baseball fields in 2021 after a pandemic-stricken 2020, customers flocked to Dick's stores and other sporting goods retailers. Not surprisingly, the company had a banner year in fiscal 2021. Revenue for the year increased 28% to an all-time record of $12.3 billion.
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But late last year, the Federal Reserve telegraphed that it would begin tightening its monetary policy as inflation rose. At the same time, the global supply chain continued to show signs of weakness as countries rebounded from COVID shutdowns at a staggered pace.
Retailers all over the U.S. had issues getting the inventory they needed to meet demand that was still growing at the time. Though it was tough to get products on shelves, Dick's forged ahead. On the company's fiscal 2021 fourth-quarter earnings call in March, CEO Lauren Hobart said, "[W]e are turning our inventory very, very quickly just due to supply chain challenges and inventory challenges. And we do hope as we go forward that we will continue to build inventory this year so that we can be even more in stock than we are now."
The economy has cooled since the Federal Reserve ratcheted up interest rates in early 2022. For its fiscal 2022 first-quarter earnings report in May, same-store sales declined 8.4%, a stark reversal from fiscal 2021's 26.5% growth. Management changed its tone and reduced full-year guidance too. At the beginning of the year, the company had forecast conservative same-store sales between a 4% decline and flat. Dick's then lowered its outlook to a full-year decline of 8% to 2% with the first-quarter report.
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The situation puts Dick's in an onerous position, because the latest earnings also showed it grew its inventory balance to over $2.8 billion, its highest level on record. If the company continues to see declining same-store sales in the coming quarters, it could have difficulty clearing out the inventory it thought it would need, resulting in costly write-downs.
Now what?
Without knowing precisely what products Dick's holds in its inventory, it's difficult for investors to understand the true risk presented by the massive amount of goods in its stores and warehouses. For instance, it might be manageable if the company can cancel new orders and turn its current inventory over quickly.
Given the seasonal nature of sporting goods, that's a complicated task. Spring baseball and track equipment, for example, would be harder to clear out than fall football and soccer equipment. Factors like this will determine whether the company can right-size inventory over the next few months.
Dick's could also reduce prices to boost sales of potentially stale inventory. That would take a toll on its gross margin, but even worse, price reductions might not be sufficient if a recession takes hold. Whatever lies ahead for Dick's, investors may want to avoid the risk embedded in the stock.
