FINANCE

Analysis: Dick’s not doing enough to keep its stores relevant

Although Dick’s overall sales decline is partly down to a shorter trading period compared to last year, this does not explain all the deterioration. On a same-store basis where the extra week of trade is removed, revenue still slipped by 2.2%. And this came off the back of a weak prior year comparative when same-store numbers dipped by 2%.

Operating and net income also fell – again, the shorter period did not help. But neither did the lower gross margin rate which was affected by reduced store productivity and higher fulfillment costs from the growth in online ordering.

One of the issues dragging down Dick’s is the loss of customers following its various positions and statements on firearms. Our data show that a lot of hunters and gun enthusiasts have migrated to retailers like Bass Pro and to smaller specialists. At the same time, Dick’s has not benefitted from an upswing in trade among those who agree with its gun policy. We make no political judgement on Dick’s stance. However, it has clearly had an adverse impact on sales.

Away from the hunting and outdoor segments – the latter of which have also been affected by a decline in hunting customers – Dick’s performed reasonably across several other categories, including apparel and footwear – especially when the problematic Under Armour brand is removed from the mix. However, we remain concerned about the shift in where business is being done. This is increasingly moving away from stores to online, where sales grew by 17% on an adjusted basis this quarter. While this shows that Dick’s investments in its website and fulfillment capabilities are paying off, it remains dilutive to margins and is undermining the performance of stores.

In part, we view such cannibalization as a function of changing patterns of consumption. Indeed, we applaud Dick’s for investing in channels where its customers wish to shop. However, we also believe that the chain has not put in place adequate steps to revitalize its shops and keep them relevant in the digital era. From our data, Dick’s attains low scores for store ambience and store inspiration, where it is way below rivals like Nike, REI, Lululemon and Bass Pro. In our view, little attempt has been made to create an aspirational and engaging shopping experience —something that is vital if customers are to be enticed into stores.

A further problem for Dick’s is that it is suffering from the heavier push of non-specialists into sports. Target and Kohl’s, for example, have both increased their market share of the general sportswear category over the past year. While this has not affected more specialist areas such as equipment, it has reduced the number of occasional shoppers who use Dick’s. Notably, some of these are deterred by what they see as a confusing and hard to shop offer.

We recognize that Dick’s is making changes, including thinning out ranges and being aggressive on lease negotiation as store obligations expire and come up for renewal. It is also making strides in the development of own brands. However, we believe it needs to move faster – especially in terms of store and product proposition – if it is to improve productivity and stem the tide of defections to other retailers.

The outlook for 2019 seems reasonable. Dick’s expects to return to positive comparable in the second quarter. However, given the very soft prior year numbers this is hardly impressive. It merely underlines that there is a lot more work to do if Dick’s is to thrive.

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