DICK’S Sporting Goods Inc. DKS seems to be doing the right things, which includes the review of its hunting business. It has also increased investments in core categories. Gains from these are well reflected in the quarterly performance and share price movements of the athletic goods retailer. The Zacks Rank #1 (Strong Buy) stock has rallied 23.7% in the past three months, outperforming the industry’s growth of 4.1%.
Notably, the company delivered same-store sales (comps) growth of 6% in third-quarter fiscal 2019. Analysts believe that DICK’S Sporting’s decision to remove the hunting category from its stores has contributed significantly to comps growth. Though negative comps at the hunting business continued to hurt consolidated comps, the company offset most of the decline from growth across each of its primary categories — hardlines, apparel and footwear.
Exit of Hunting Category
DICK’S Sporting’s decision of removing the hunting business in a phased manner across its stores was instigated by the shootout on Feb 14, 2018, in Parkland, FL. Following the incident, the company pulled back on gun sales in stores and destroyed about $5 million worth of firearms.
We note that the removal of the hunting category in an additional 125 stores at the end of the fiscal second quarter contributed to the decline in the category in the third quarter. However, overall, stores that eliminated the hunting business delivered positive comps in line with the rest of the chain. This was mostly attributed to the replacement of the hunting category with more compelling assortments in these stores.
Going forward, management plans to continue the review of the hunting business, which is part of the Field & Stream format. In the fiscal third quarter, the company closed eight Field & Stream stores as part of its efforts to exit the hunting business.
Reallocation of Merchandise
In addition to the elimination of the hunting category, DICK’S Sporting’s growth story is supported by its space-reallocation efforts to differentiate its assortment. As part of these initiatives, the company is efficiently reallocating floor space in its stores with growing categories and adapting products to suit the needs of each market. It is also improving relations with its brand partners to provide the best athlete experience at its stores.
Some of the company’s efforts to improve in-store experience include space reallocation to locally relevant and growing categories, rollout of HitTrax technology and batting cages in several stores, expansion of strike point presentations, and investment in product development teams. Further, it remains focused on private brands — including CALIA, Walter Hagen Alpine Design and DSG — which remain key strengths within its assortment. DICK’S Sporting also remains encouraged about its product pipeline for fiscal 2020.
These actions are not only improving customer satisfaction and inventory turnover but also boosting merchandise margin rates for the company. Apparently, merchandise margins expanded 60 basis points (bps) in third-quarter fiscal 2019, mainly driven by favorable merchandise mix and lesser promotions. This further boosted gross margin, which expanded 140 bps in the third quarter.
In all, DICK’S Sporting looks poised to gain from the transformational efforts, with key adjustments to its product line up. We believe that exiting the low-margin hunting business is a move in the right direction as it gives way for the growth of other higher-margin product categories, including apparel and footwear, and expanding its online offerings.
Other Favorable Retails Picks
Hibbett Sports, Inc. HIBB has a long-term earnings growth rate of 12.2%. It currently flaunts a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Zumiez Inc. ZUMZ has a long-term earnings growth rate of 12%. It sports a Zacks Rank #1 at present.
Boot Barn Holdings, Inc. BOOT has an impressive long-term earnings growth rate of 17%. It presently carries a Zacks Rank #2 (Buy).
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