FINANCE

Dick’s Q3 tops estimates; issues weak 2018 outlook on business investments

BY Marianne Wilson

Dick’s Sporting Goods topped Street expectations in its third quarter, but forecast a big drop in profit next year based as its makes significant investments in e-commerce and other parts of its business.

The nation’s largest sporting goods retailer reported that consolidated net income totaled $36.9 million for the quarter ended Oct. 28, or $0.35 per diluted share, down from $48.9 million, or $0.44 per diluted share, in the year-ago period. Earnings, adjusted for pretax gains, came in at 30 cents per share. Analysts predicted an average of 26 cents per share.

Net sales increased 7.4% to approximately $1.94 billion, also better than expected. E-commerce sales increased about 16%, accounting for 10.3% of total sales. Consolidated same-store sales decreased 0.9%.

“In the third quarter, we delivered earnings per diluted share and comp sales at the high end of our expectations, with continued double-digit growth in e-commerce,” said Edward W. Stack, chairman and CEO. “As expected, margins were under pressure in this highly promotional environment, but our strategy for this environment enabled us to continue to capture market share. As we look to the fourth quarter, we are comfortable with our prior implied sales and earnings outlook, and believe we are well positioned to gain additional market share.”

Looking ahead to next year, Dick’s said plans to make significant investments in its business, including in its e-commerce operations, in-store technology and store payroll. Meaningful investments will also be made to Dick’s Team Sports HQ, and in the development and support of its private brands.

“All of this will have a short-term negative impact on the company earnings; however, we expect these investments will pay meaningful dividends in the future,” Stack said. “Given these investments, continued gross margin pressure and approximately flat comp sales, we expect earnings per diluted share to decline by as much as 20% in 2018.”

As of October 28, 2017, the company operated 719 namesake stores in 47 states, 98 Golf Galaxy stores in 32 states, and 35 Field & Stream stores in 16 states.

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FINANCE

Hurricanes, fashion missteps take toll on off-price giant

BY Marianne Wilson

High-flying TJX didn’t fly quite so high in its third quarter, reporting a rare miss in sales.

The TJX Cos. reported flat same-store sales in its third quarter, citing the negative impact of a series of hurricanes during the period, unseasonably warmer temperatures and a fashion miss.  Analysts had expected an increase of 2.4%.

Net sales for the quarter, ended Oct. 28, increased 6% to $8.8 billion, slightly below estimates. Same-store sales were flat compared to last year’s 5% increase. By brand, same-store sales were down 1% at Marmaxx (Marshalls and T.J. Maxx), and up 3% at Home Goods and 1% at TJX International.

Net income rose nearly 17% to $641.44 million, or $1 per share, on higher margins, compared to $550 million, or 83 cents per share, in the year-ago period. Gross profit margin came in at 29.8%, up from 29.5% last year.

“While sales were not as strong as we would have liked, we were pleased that sales trends at Marmaxx improved as the weather turned more seasonable,” said Ernie Herrman, CEO and president. “Further, customer traffic, or transactions, were strong and up at every major division. Importantly, our consolidated merchandise margin increased, which we believe speaks to the flexibility of our off-price business model.”

On the chain’s quarterly call, Herrman also cited fashion missteps, which he said would be corrected in the current quarter.

“It was absolutely a fashion miss … this was, really, on our own part a selection issue and had nothing to do with availability out there,” Herrman said.

Looking ahead, Hermann said the fourth quarter is off to a strong start.

“We have excellent inventory liquidity to capitalize on the plentiful opportunities we are seeing for quality, branded merchandise in the marketplace,” he said.

The retailer expects holiday-quarter same-store sales growth of 1%-2%. It maintained its fiscal 2018 profit forecast at the high-end of the range of $3.91 to $3.93 per share.

During the third quarter, the company increased its store count by 139 stores. As of October 28, 2017, the retailer operated a total of 4,052 stores in nine countries, the United States, Canada, the United Kingdom, Ireland, Germany, Poland, Austria, the Netherlands, and Australia, and three e-commerce sites.

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FINANCE

Fitch: Large banks keep lid on retail sector exposure

BY Marianne Wilson

The largest U.S. banks are keeping their exposure to the beleaguered retail sector in check, according to Fitch Ratings’ latest Banks Chart of the Month.

The retail sector is unlikely to threaten the banks’ ratings given their limited exposure, strong core earnings and healthy capital levels. However, disruption to retailers from e-commerce underscores the need for banks to stay abreast of technological change and adjust their exposures accordingly, advised Fitch.

Large banks are actively reducing exposure to the most challenged retail segments and using asset-based lending to limit their retail sector risk. Fitch estimates that balance sheet exposures to retailer commercial real estate and retail commercial loans represent 9% and 14%, respectively, of common equity tier 1 capital in aggregate across large Fitch-rated U.S. banks.

Retail exposure in banks’ securities portfolios is minimal. Only 2% of portfolios in aggregate are invested in CMBS that do not carry a government or government-sponsored entity guarantee.

U.S. retail loan default rates have risen sharply to about 7% this year (on a trailing 12-month basis) after several years below 1%.

“We forecast them to reach 10% next year as brick-and-mortar sales continue to decline in the face of online sales,” Fitch stated.

Not all retailers are equally challenged. Retailers of consumer staples are more susceptible to disruption from online competitors than convenience stores and grocery stores, for example, although Amazon’s recent acquisition of Whole Foods could signal that this is changing, according to Fitch.

Fitch’s Banks Chart of the Month is available at Fitchratings.com, or by clicking here.

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