I have had a dozen people ping me this morning asking ‘so, are you still the perma-bear on Dick’s?’ The short answer is ‘No!’ I am not a perma-bear/bull on anything. Yes, I have been very negative on the Dick’s story for the better part of a year – and have had very good reason. I don’t think that Wall Street appreciates the impact that the confluence of aggressive lease acquisitions and several material changes in the sporting goods retail space will have on DKS organic cash flow trajectory. I step back every day and retest my thesis, search for facts that could prove me wrong, and see how all this synch’s with market expectations. So far I have come up dry, and this quarter did nothing to change that. As I posted on 7/28, “Prepare to Whack-A-Mole” on a sandbagged 2Q. We’re still a buck or two away from the point where Keith’s models suggest playing that game. But stay tuned…
First off, let’s face some facts, this was a lousy quarter. Square footage up mid-teens, but comps down 3.7%, new store productivity eroding, and total sales netting out to a +7% rate. Gross margin rate down, SG&A deleverage, EBIT margins off a full point, and earnings down 6%. Yuck!
Yes, there are one-off things you can point to like cycling the impact of Heelys, and weakness in golf (temporary?), both of which hurt sales. But let’s not forget that in 2H DKS cycles Nike’s ACG launch, as well as exclusives from Adidas – and I’m pretty confident that these guys won’t be anywhere near as generous with terms as they were last year. Also, Under Armour is getting tighter with the mall retailers at the same time it is doing more business with Sports Authority.
TSA, in turn, is opening stores left and right (11 on 8/16 alone – and will add 37 this year) and is growing its footprint. Dick’s is expanding its reach as well into markets like Texas and Arizona. Is it a coincidence that the competitive landscape is getting tighter at the same time comps are weak and new store productivity turns down? No way folks… Moving into more expensive markets, with a less efficient infrastructure, and a lesser-known brand is rarely a good near-term event. Check out my 5/22 DKS post “Drink Facts, Not Kool-Aid” as to why I think that the lease structure for DKS is misaligned with economic reality.
I still think that the right margin rate for this company is about 4%, a far cry from the 6% it is likely to report this year. My biggest worry is that the company will pull another dilutive deal out of its hat and mask the true erosion in organic cash flow and returns.
This chart is a bit messy. It is going to get messier as footprints increasingly overlap.