What happened
Shares of athletic retail chain Dick's Sporting Goods (DKS 1.43%) dropped on Tuesday after the company reported quarterly financial results showing a sharp drop in its profitability. As of 10:20 a.m. ET, Dick's stock was down almost 24%, falling to its lowest price in 2023.
In the fiscal second quarter of 2023, which ended in July, Dick's had net income of $244 million, a whopping 23% decrease from net income of $319 million in the same quarter of last year. And with its profits unexpectedly fading, shares of Dick's sold off today.
So what
I believe Dick's net income numbers would have been more tolerable if sales had fallen as well. But the company's net sales increased 3.6% year over year (YOY), bolstered by same-store sales growth of 1.8%.
So Dick's profit margins are contracting, which the market likely perceives as a bigger issue. In Q2, the company's net margin was 7.6%, compared to a margin of 10.3% in the prior-year quarter. Even in the first quarter, margins were much higher, at 10.7%.
Management cited inventory shrinkage as the problem with profitability. Basically, Dick's has less inventory than it should, likely due to theft. And that's not necessarily an easy problem to correct.
Now what
As a result of shrinkage, Dick's lowered its full-year profit guidance while maintaining its net-sales guidance. It still expects to grow same-store sales by up to 2%. But it expects earnings per share (EPS) of only $11.33 to $12.13. For perspective, it previously guided for EPS of $12.90 to $13.80.
The market is selling Dick's stock as it resets its expectations. But the numbers aren't all bad. Even if the company hits the bottom of its new guidance, that still represents 5% YOY EPS growth.
