On Monday, Dick’s Sporting Goods (DKS, Financial) reported results in line with expectations for the fourth quarter, but also experienced weakness and troubles in areas of its business.
Dick’s, the largest sporting goods retailer in the U.S., had $116 million in net income, or $1.11 per diluted share, within the company’s target range of $1.05 to $1.117 per diluted share. It also beat last year’s fourth-quarter earnings of $90.2 million, or 81 cents per share.
Net sales totaled $2.66 billion, also increased from $2.48 billion seen in the fourth quarter last year.
In the earnings release, the company’s chairman and CEO, Edward W. Stack, addressed a glaring point of weakness for the company – margins.
“As expected, margins remained under pressure, however the decline was less than we anticipated," Stack said.
Operating margins have been in decline at the company since 2013, following a larger trend in the retail industry. Operating margin at Dick’s was 5.2%, higher than 61% of the companies in the global specialty retail industry and below its 10-year median of 7.14%. Margin deterioration indicates stiffer competition and erosion of pricing power.
One significant area of trouble was the Under Armour (UA, Financial) brand, where expanded distribution and heavy promotions led to lower sales.
In response, the company will “aggressively adapt” its apparel business by giving more space to its private brands and to brands performing well, Stack said, as it seeks to maintain its leadership position in the industry. Brands with a stronger innovation pipeline that it hopes to focus on include Nike (NKE, Financial), Adidas, Callaway, Taylor Made and its own brands, aiming for margins to be impacted “less than previously anticipated.”
“We’re focused on leveraging financial strength to make critical investments in the business in order to improve efficiency and earnings over long run,” Stack said in a conference call.
The company has a light balance sheet, with $112 million in cash and $455 million in long-term debt, but a medium financial strength ranking of only six out of 10. A negative factor in its financial strength rating is its interest coverage, or the measure of how easily it can pay interest expenses on its outstanding debt. Dick’s interest expense coverage is 53.6, at the low end of its range for the past 10 years. It also ranks higher than 57% of the companies in the global specialty retail industry.
Sales at Dick’s Sporting Goods have witnessed steady increase over the past 10 years, with much recently coming from online. Ecommerce sales increased 9% after a first holiday season on a new web platform, and ecommerce increased to 19% of total sales from 17.9% in the fourth quarter last year.
But same-store sales continue to feel heat. Sales for those stores declined 2%, which was steeper than the low single-digit decrease the company expected. For 2018, Dick’s expects sale store sales to be in a range of approximately flat to a low single-digit decline, versus the 0.3% decline for 2017.
Dick’s said it would cease reporting quarterly expectations beginning in 2018 “to more closely align with industry practices.”
