On Tuesday, mid cap Dicks Sporting Goods (NYSE: DKS) sank 11.01% after Q4 earnings and after management dropped three bombshells (or near bombshells) that could significantly impact the Company's future performance:
1) Dick's Sporting Goods will stop selling hunting products, including rifles and ammunition at 125 stores in 2019, with the Chairman & CEO having this to say in the earnings call (a transcript is available here):
Late in the third quarter, we removed hunt -- we removed the hunt category from 10 Dick's stores where it underperformed and replaced it with a more compelling assortment. These 10 stores generated positive comp sales and had a strong margin-rate improvement during the fourth quarter.
Following this success, we will remove hunt from approximately 125 additional Dick's stores in 2019 where the category underperforms. It will be replaced with merchandise categories that can drive growth, each based on the needs of that particular market.
The CFO added:
During the quarter, our best performing categories included apparel, athletic footwear, outdoor equipment fitness and our private brands. Apparel and athletic footwear each delivered low-single-digit comp increases. The strength in athletic footwear is driven by key brands and represented an improvement compared to the prior quarter. Additionally, we were pleased with the performance of outdoor equipment and fitness each posting strong comp increases. The strength in outdoor equipment was driven by improved in-stocks and strike points across strategic vendors.
Our private brands also continued to comp positively with higher penetration. We continue to see double-digit declines in hunt and electronics, which together impacted the comp sales by 3% for the quarter. Excluding these impacts, our consolidated same-store sales increased 0.8%. Team sports also declined driven by used baseball bats as we begin to anniversary last years bat regulation change.
It is worth noting that gun sales have fallen by a double digit percentage across the sector since Donald Trump was elected as fears of gun bans have eased. In the Q&A, the Chairman & CEO clarified:
We look at this as a multi-year initiative. We -- the 10 stores we're very pleased with. We're expanding it to 120 some stores and we'll see how that goes. And if it goes as well as expected, we would probably take another batch of stores next year. This is around having productive space. And there is some places that the hunt business is very good, other places that it's not very good. And we're just allocating floor space to make our boxes more productive. And the 10 stores we're pretty enthusiastic about the response we have there.
Nevertheless, the mainstream news media (as opposed to the financial press where most people don't get their news from) has heavily trumpeted the news that guns will no longer be available at Dick's Sporting Goods and many current gun owning hunter customers may just assume that dropping guns and hunting is politically motivated – meaning they will take their business elsewhere this year. After all, EVERYTHING nowadays is political or considered to be politically motivated.
2) In the earnings call, the CFO noted further investments to be made in Dick's Sporting Goods' online business along with the necessary technology at the backend:
Looking ahead, we believe a big opportunity to continue improving our online experiences to faster and more reliable delivery. To achieve this, we're investing significantly in our fulfillment capabilities. As I mentioned last quarter, we're building two new dedicated eCommerce fulfillment centers in New York and California. These new facilities will open during the third quarter and will enable us to deliver the majority of our online orders within two business days in the near future.
The state-of-the-art facility in New York will be highly efficient as we invest in robotics to drive automation and optimize our cost per shipment. We will also continue to improve the functionality and performance of our website. This will include a faster and more convenient checkout, improved page responsiveness and exciting new content through our Pro Tips platform. In addition, later this year, we will re-platform our mobile and tablet sites. This will allow us to control our own mobile destiny and deliver quality features to our athletes faster.
However, CNBC's Jim Cramer reacted by saying that the Company "dropped the bomb" on retail by telling shareholders it must invest more in its online business (as the expense of doing so will hit margins) to fend off Amazon.com:
"That means Dick's needs to spend even more money building out its own omni-channel presence while also suffering from lower gross margins because competition from Amazon always puts pressure on your pricing… Dick's is the best at what it does, but just about everything else that they sell you can get on Amazon… Dick's is just supposed to be a company that knows sporting goods. They know baseball bats, Air Jordans, not robotics for heaven's sake… So Dick's has to keep plowing money into the most expensive, least-rewarding channel to keep up with Amazon, a company with much lower expenses… I think you gotta stay away because right now it's just too hard to be a brick-and-mortar retailer if you have too much commodity and merchandise that can be bought more cheaply and conveniently via Amazon Prime."
By staying away, Cramer meant staying away from retail stock in general and instead favor stocks like Adobe (NASDAQ: ADBE) and Salesforce.com (NYSE: CRM) as they work to make sure customers enjoy their experience and remember to come back along with Honeywell (NYSE: HON) which sells robotics to Amazon.
3) Finally, the Chairman & CEO said:
Lastly, our private brands will continue to be an integral part of this strategy to drive differentiation and exclusivity in our assortment. During 2018, our private brands remained strong, growing double digits. As a percent of total net sales, our private brand sales increased to approximately 14% compared to 12% last year. In 2019, we expect to continue to strengthen as our private brands will play an important role in our space allocation and assortment strategies.
We will expand CALIA's footprint in approximately 80 stores. Launch a new athletic apparel brand in time for back-to-school that will replace Reebok and enhance the quality of our existing offerings with a focus on product innovation. To support this strategy, we will continue to invest in our products development team to help us reach out $2 billion sales goal in private brands.
In other words, further margin compression and expenses until the new private label brand takes off.
The Company had also cut back on the space given to Under Armour (NYSE: UAA) with the Chairman & CEO repeatedly blaming them during multiple earnings calls last year for negatively impacting sales; but he noted in the Q&A: "…we're enthusiastic about our Under Armour business going forward. But it will remain in the floor space that it has today… Under Armour will turnaround in our stores."
Dicks Sporting Goods' technical chart seems to reflect investor uncertainty plus the Company has elevated short interest of 20.39% according to Highshortinterest.com.
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