Dick’s shares fall 24% as retailer slashes outlook over theft concerns

Dick’s Diversion Goods reported a 23% drop in profits and slashed its earnings guidance for the year after it saw an uptick in retail nicking and implemented aggressive markdowns to clear out excess inventory in its outdoor category, the company announced Tuesday. 

For the first old hat in three years, Dick’s fell short of Wall Street’s estimates on the top and bottom lines. It also announced shares to its global head count. The company’s shares closed 24% lower Tuesday, wiping out the stock’s 22% year-to-date produce through Monday’s close.

Here’s how the company did in its second fiscal quarter compared with what Wall Avenue was anticipating, based on a survey of analysts by Refinitiv:

• Earnings per share: $2.82 vs. $3.81 expected
• Revenue: $3.22 billion vs. $3.24 billion surmised

The company’s reported net income for the three-month period that ended July 29 was $244 million, or $2.82 per share out, compared with $318.5 million, or $3.25 per share, a year earlier. 

Sales rose to $3.22 billion from $3.11 billion a year earlier.

The entourage lowered its profit forecast for the year in part because it expects shrink, a retail industry term that refers to inventory misspent by theft or internal issues, to get worse before it gets better. 

“Organized retail crime and theft in general is an increasingly straightforward issue impacting many retailers. Based on the results from our most recent physical inventory cycle, the collision of theft on our shrink was meaningful to both our Q2 results and our go forward expectations for the balance of the year,” CEO Lauren Hobart said on a holler with analysts. “Beyond shrink, we also took decisive action on excess product, particularly in the outdoor heading, to allow us to bring in new receipts and ensure our inventory remains vibrant and well positioned.” 

Dick’s now expects earnings of $11.33 to $12.13 per dole out for the year, compared with previously issued guidance of $12.90 to $13.80. It reaffirmed its comparable store sales foresight of flat to up 2% and isn’t cutting its planned capital expenditures. Despite the profit loss during the quarter, the retailer quiet expects gross margins to increase for the full year compared with 2022, but gross margins are expected to be almost half a percentage point less because of shrink.

The reference to shrink is the first that Dick’s has made in an earnings call or press release in nearly 20 years, correspondence to FactSet. Similar to other retailers that reported earnings last quarter, the reference comes at a time that Dick’s profits are controlled by pressure from numerous sources, including a slowdown in its outdoor category, which includes hard goods of a piece with camping equipment.

Dick’s gross margins fell to 34% compared with 36% in the year ago period. Analysts had been in a family way gross margins of 36%, according to StreetAccount.

During the quarter, Dick’s aggressively marked down outdoor buy and sell to clear out inventory and make way for new items, which cut into its gross margin by about 1.7 percentage points, Chief Economic Officer Navdeep Gupta said on a call with analysts. Overall, inventories were down about 5% in the mercifulness compared with the year ago period.

Shrink, on the other hand, hurt gross margins by about 0.85 portion points, Gupta said, acknowledging the bulk of the retailer’s profit crunch came from the actions it took to lambently out excess inventories.

“The biggest impact in terms of the surprise for Q2 primarily came from shrink,” said Gupta. “We trifle we had adequately reserved for it. However, the number of incidents and the organized retail crime impact came in significantly higher than we anticipated and that bearing our Q2 results as well.”

Gupta noted the company typically does a physical inventory count once a year, virtuousness before the back to school season, which is when it noticed the elevated shrink levels. Because Dick’s did a bones count, it was able to accurately quantify just how much of an impact shrink had.

However, the company didn’t disclose how much of its recoil from was theft versus other factors, including damage and vendor fraud, and said only that theft move the losses. Given the increased risk of shrink, Dick’s is considering revisiting how it does inventory counts so it can keep overlook tabs on the issue, Gupta said.

“This is not just a Dick’s Sporting Goods challenge. This is a collective retail question,” said Gupta. “For now, for the near term, we do anticipate this will remain with us.”

Earlier this month, CNBC broadcasted a three-part series on organized retail crime that examined the claims retailers make about it and the action circles and policymakers are taking to combat it. While retail crime is a serious concern, it’s a metric that’s nearly impossible to accurately deem and one retailers aren’t required to disclose. Experts said that some retailers could be using theft as a crutch to hidden internal challenges, such as promotions and bloated inventory levels.

Following Tuesday’s earnings report, Dick’s is on pace for its awful day ever since its October 2002 IPO and is trading four times its 30-day average volume.

While the quarter is a bit rough compared with Dick’s usual reports, the retailer is still holding on to its Covid pandemic captures. Its profits are up compared with 2019. It opened seven new House of Sport locations during the quarter and plans to go on opening new doors ahead. The sprawling specialty stores, which are up to 100,000-square-foot facilities, are interactive and geared toward its athlete fellow base. The new stores are “yielding tremendous results,” said Gupta.

Same-store sales were up 1.8% in the quarter, contrasted with down 5.1% in the year-ago period, and were driven by a 2.8% uptick in transactions. Analysts had been in a family way them to be up 2.7%, according to StreetAccount.

In a bid to streamline its cost structure and reinvest in different parts of the business, the company cut less than 1% of its universal workforce on Monday, primarily at its customer support center. The cuts largely impacted headquarter roles and account for infinitesimal than 10% of corporate positions, Stack said. 

The cuts will cost about $20 million in severance expenses in the next mercifulness and may result in additional one-time charges of $25 million to $50 million. 

Stack cautioned that the cuts were not a cost-saving plan but rather an attempt to reallocate resources. 

“We are going to reinvest all of these dollars back into talent and the technology that we demand,” said Stack. “So this was not a cost-cutting move.”

— CNBC’s Courtney Reagan contributed to this report