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Dick's Sporting Goods Couldn't Get Over the Hump in 2018

Nicholas Rossolillo, The Motley Fool

Sporting-goods specialty store Dick's Sporting Goods (NYSE: DKS) ended its 2019 fiscal year with a thud. The stock fell 11% last Tuesday following the release of fourth-quarter results. Earnings per share increased 8% over the same period a year ago, but total sales adjusted for an extra week during the 2017 holidays were down 6.5% and comparable store sales were down 2.2%.

That caps off a year of declines for the chain, all while retail sales were up an impressive 5% in 2018. Sporting-goods stores were a poor performer, though, under pressure from online and general merchandise stores -- think the big-box variety like Walmart (NYSE: WMT) -- and the U.S. Census Bureau has indicated that trend was continuing early in 2019. January sales at sporting-goods and hobby stores fell 6.2% year over year. Adding to the negative numbers was the company's decision to part ways with some types of firearms last year, angering some patrons of the company. With the fiscal 2020 outlook underwhelming, it doesn't look as if the stock will be going higher for some time.

Electronics and guns weigh on Dick's

Metric

12 Months Ended Feb. 2, 2019

12 Months Ended Feb. 3, 2018

YOY Change

Revenue

$8.44 billion

$8.59 billion

(2%)

Gross profit margin

28.9%

29%

(0.1 p.p.)

Operating expenses

$1.99 billion

$1.98 billion

0%

Earnings per share

$3.24

$3.01

8%

Data source: Dick's Sporting Goods. YOY = year over year; p.p. = percentage point.  

Sales have been suffering from the decision to stop selling assault weapons and electronics last year. Instead, the company has been doubling down on athletic apparel, launching its own private brands, such as CALIA by Carrie Underwood, and rolling out exclusive lineups from product partners.

Those initiatives did little to move the needle though, not quite offsetting losses from guns and electronics nor improving gross profit margins. Earnings went up anyway, but that was due to a lower tax rate because of U.S. corporate tax reform. Now that the effect of lower taxes has been lapped, the picture doesn't look quite as good for the bottom line in the new year.

A baseball in a glove and baseball bat laying in grass.

Image source: Getty Images.

What's next?

Dick's will spend money in the coming year to keep promoting its digital store (online made up about 20% of sales last year) and encourage private brand and exclusive offering sales. CEO Ed Stack had this to say on the quarterly earnings call:

Enhancing the athlete experience in our stores is critical to our long-term growth as our stores generate approximately 80% of our total revenue. We, therefore, need to ensure that they meet the demands of all athletes from the beginner to the enthusiast. That said, we will continue to optimize our assortment, reallocate floor space to regionally relevant and growing categories, and make our stores more experiential. 

As to "optimizing assortment," that will probably mean shunning more hunters. After giving assault weapons the ax, the company has been experimenting with the removal of its hunting section in select locations and is pleased with the results from allocating the space to other categories. Thus, another 125 stores will have hunting departments removed in 2019 where hunting is of less interest. https://www.fool.com/premium/coverage/earnings/call-transcripts/2019/03/12/dicks-sporting-goods-inc-dks-q4-2018-earnings-conf.aspx

That could make sense, as Dick's Sporting Goods already operates Field & Stream stores where hunting equipment does well. But it could also further alienate that segment of its customer base. Only time will tell. Nevertheless, the sporting-goods chain expects comparable-store sales to begin to rise again starting in the second quarter and sees full-year comps flat to up 2%. Not exactly setting the world on fire, but at least it's positive.

As for the bottom line, earnings for fiscal 2020 are expected to be $3.15 to $3.35 per share, which neatly brackets earnings from the just-completed 2019 fiscal year. That guidance does include $30 million (or $0.30 a share) in investment back into the business. But with the company's investing thus far not paying off, that's what had shareholders in a grumpy mood post-report.

And rightfully so. With total sales not moving much and earnings now following suit, there's not much to get excited about at the moment with this stock.

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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.