Dick's Sporting Goods Tempers Expectations With Q3 Results

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Shares of Dick's Sporting Goods (NYSE: DKS) initially declined after the company reported its third quarter 2017 earnings. Results actually beat management's guidance, but the outlook for the business in the year ahead kept a lid on optimism.

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Q3 by the numbers

Metric

Q3 2017

Increase (Decrease) Over Last Year

Revenue

$1.94 billion

7.2%

Earnings per Share

$0.35

(20.5%)

Comparable Sales

(0.9%)

N/A

Total Store Count

852

9%

Digital Sales % of Total

10.3%

7.3%

The reigning king of sports-only retail managed to increase sales 7.2% during the third quarter. That comes in spite of a 0.9% drop in comparable-store sales in a challenged industry where discounting has become a hallmark. Profits as measured by earnings per share fell by 20.5% as a result.

However, Dick's was able to support more brick-and-mortar store openings -- 70 more since last year -- including 15 new Dick's Sporting Goods and 6 Field & Stream stores during the quarter. Digital sales also crossed the 10% of total sales mark as the company continues to diversify its selling strategy across its storefronts and online.

Even though the bottom line was pressured, quarterly results beat management's guidance for only $0.22 to $0.30 in earnings per share and a full single-digit decline in comparable sales. With the beat, full-year earnings guidance was increased to $2.95 to $3.07 per share, compared with $2.85 to $3.05 previously.

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The year ahead

Dick's Sporting Goods also gave some preliminary insight into 2018. Investors can expect profits to struggle as the company evolves in a digital world. Gross profit margin was down to 27.5% in the third quarter from 30.5% a year ago. Expect that trend to continue. As to why, CEO Edward Stack had this to say:

We plan to make significant investments in our business, which will have a short-term negative impact on our earnings. However, we expect these investments will pay meaningful dividends in the future. We plan to increase investments in our e-commerce business, the technology in our stores, and store payroll in order to enhance the customer experience. Meaningful investments will also be made to Dick's Team Sports HQ, and in the development and support of our private brands. 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 percent in 2018. 

Coming out the victor last year when rivals like Sports Authority shuttered operations, Dick's seems to be shifting its focus to further develop online assets and technology. Investing in new exclusive brands has also been a strategy in the past, for example the CALIA by Carrie Underwood fitness gear for women. Look for more of that to be rolled out -- a strategy that is being utilized by another other struggling retailers like Target.

Under promising and over delivering?

With the retail industry shifting, it hasn't been a pretty year for Dick's Sporting Goods shareholders. The stock is down nearly 50% year to date. With profits expected to come under further pressure in 2018, that pain is likely to continue.

However, management could merely be setting expectations to deliver another quarterly beat down the road. Guidance aside, the forward one-year price-to-earnings ratio of just 10x implies a fair amount of pessimism is already priced into the shares.

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Nicholas Rossolillo owns shares of Dick's Sporting Goods and Target. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.