Dick’s Sporting Goods has a Foot Locker Problem

Motley Fool Hidden Gems Investing

Dick's Sporting Goods reported disappointing earnings, with shares dropping 27% after missing on both top and bottom lines. The company cited

Key takeaways

Foot Locker's underperformance is driving Dick's Sporting Goods' earnings decline, with comps down 3.6% despite a 5% growth in core Dick's stores.
The company slashed full-year earnings guidance by 18%, primarily due to Foot Locker's struggles and inventory surging 63% year-over-year.

Main topics

Dick's Sporting Goods earnings report
Foot Locker acquisition performance

Notable quotes

"Conditions deteriorated as the quarter progressed." - CEO of Dick's Sporting Goods

Conclusion

While Dick's Sporting Goods' current struggles are largely tied to the Foot Locker acquisition and broader industry

Transcript preview

Speaker 3 (0:01) Dick's Sporting Goods stock has a case of athlete's foot. Motley Fool Hidden Gems Investing starts now. Speaker 3 (0:09) Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors Rachel Warren and Matt Frankel. Guys, the earnings season has been winding down a little bit. I was looking for stories earlier today, but the news was looking a little thin. And then Dick's Sporting Goods reported earnings, and based on the stock reaction, we had to talk about it. Shares of Dick's Sporting Goods... stock is down about 27 % as we're taping right now after the company reported earnings and updated guidance. Now, like most investors, I would assume this means the news was bad, but we've seen like a lot of companies post decent results this quarter, only kind of see their shares take it on the chin in the ensuing market reaction. So, Rachel, is that the case here? Give us a rundown of what happened and what were your guys' thoughts and reactions to what? Dick's Sporting Goods had to say here. Speaker 2 (1:03) Yeah, I mean, there was actually some concerning numbers that came in. And it's interesting to chat about. We don't spend a ton of time focusing on retail here on this show. So Dick's actually missed on both the top and bottom lines for the quarter. They had adjusted earnings per share come in at $3.53. Wall Street was looking for $3.76. Revenue dragged a bit, just under $6 billion. Wall Street was looking for a little bit more than that. A lot of this is going back to the Foot Locker business, which Dick's Sporting Goods acquired last year. That's the primary culprit behind this drag. And it's interesting because you have the core Dick's namesake stores. They posted a roughly 5 % comparable sales increase. Foot Locker stores actually saw comps slide 3.6%. And you had management saying that they had fewer high-profile shoe launches. It's an increasingly competitive. discounted market that's actually forcing them to cut prices to protect their market share. But the other thing that's interesting here is this is also tied to the broader, what's called the Nike ripple effect. So we saw management essentially call out a lack of high profile sneaker launches. They're pointing upstream to major partners who are stuck in a creative lull, if you will. And you've got to bear in mind, Foot Locker has historically relied on these legacy silhouettes, retro launches. And so Dix is really feeling the pain first when consumer hype slows down. Another key number, total inventory surged 63 % year over year. Now, obviously. They're still absorbing the Foot Locker acquisition, but they're carrying a lot of inventory, probably looking for a lot of clearance sales and promotions, which, you know, great for consumers, not great for the business, not great for investors. And to top it all off, Dick slashed its full year earnings guidance considerably. So really not a great readout for this business. Speaker 1 (2:54) Yeah, I mean, the numbers weren't great, but I mean, you're right. To me, the sharp decline, it's almost as much as what management said. and not just the numbers. I mean, the CEO called out the quote, increasingly promotional athletic footwear and apparel market, said that conditions deteriorated as the quarter progressed, which is something you really don't like hearing from management. Also said Foot Locker has a lot of exposure directly to the categories getting discounted the most. So just a couple of things to point out here. So, I mean, Dick's stock was down 10 % year to date going into this. So now it's really underperforming. It's clearly a cyclical problem in the footwear space. I mean, if you look at Nike, Under Armour, even Academy Sports, which is, I would call their closest direct comparison, and On Holdings, they're all underperforming too. You know, Dix has a large buyback authorization, is one of the key things I read in the earnings report, $3 billion. I'm curious to see if they accelerate their repurchases to kind of send the market a signal here. Speaker 3 (3:55) You know, one of my favorite things in like these conference calls every once in a while is the management word salad that we get of trying to explain why all this happened. One of the best ones I think I saw in this conference call was they mentioned geopolitical troubles, which apparently is affecting shoe sales. Look, some things are believable, but I don't know if, you know, closure of the Strait of Hormuz is exactly affecting how many people are buying Nikes before and after the World Cup here. Maybe, Speaker 2 (4:23) but we'll see. Speaker 3 (4:24) The thing that really pointed, it stuck out to me, and Rachel, you mentioned it here too, was Foot Locker specifically. This was an acquisition that Dix kind of took, I don't want to say took a flyer on, that would be a little too flippant, but this was slightly different than what they have normally been doing. Like you said, it's a little bit more fashion trend, you know, very dependent on releases of signatures, shoes, and stuff like that. And it's still, I would call it like indigestion of the acquisition. Was this acquisition a mistake in your guys' opinion, Speaker 1 (5:00) or maybe is it a little too soon to call it that? I mean, I'd say it's too soon to call it a mistake, but it's not too soon to say that it's definitely going poorly. Those aren't the same thing. Dix cut their full year earnings guidance, as Rachel mentioned, by 18%, and it's almost entirely because of Foot Locker. It's in a deteriorating environment. For the entire footwear industry, as I said, it's not just a footlocker problem. This was a turnaround acquisition. You can't judge that after just four quarters. The company's making the right moves. They closed 110 stores in year one after the acquisition. So they bought a cyclical turnaround play and the cycle immediately went against them. So it's too soon to tell if it's ultimately going