A rare misstep for Dick’s Sporting Goods

The addition of new stores and a 3.8% same-store sales increase enabled Dick’s Sporting Goods to report record second-quarter results, so long as a botched investment in a leading U.K retailer is excluded.

Sale for the quarter ended July 28 increased 10% to $1.4 billion due primarily to a 3.8% comps increase combined with the addition of four new stores. The 3.8% increase consisted of a 2.9% increase at Dick’s Sporting Goods stores, a 4.4% increase at Dick’s Golf Galaxy stores and a 34.6% increase in the company’s e-commerce business.

“We have delivered another exceptional quarter, and are on track to post strong full-year performance for 2012,” said Ed Stack, Dick’s chairman and CEO. “We plan to drive continued long-term profitable growth by investing in new stores, developing our omni-channel capabilities and increasing our margins through inventory management, an emphasis on private brands, and the continued shift of our product mix to higher margin merchandise categories.”

Second quarter profits, including a $32.4 million, or 22 cents a share, asset impairment charged related to an investment in JJB Sports, declined to $53.7 million, or 43 cents a share, from $73.8 million or 59 cents a share the prior year. Excluding the negative effect of the investment in JJB, an operator of 180 stores in the United Kingdom and Ireland, profits increased to $81.3 million, or 65 cents a share, three cents better than the upper end of the guidance range the company provided on May 15, compared with last year’s second quarter profit of $65.1 million, or 52 cents a share.

Dick’s announced its investment in JJB on April 4 and things apparently head south quickly thereafter as the company said JJB’s performance materially deteriorated from expectations. The poor showing was blamed on a worsening macro environment in Europe, adverse weather conditions in the first quarter and lackluster sales associated with the recent Euro Championships.

“While we continue to believe in the underlying opportunity within the United Kingdom sporting goods market, in light of these developments and our own assessments, we have determined to fully impair the value of our investment,” Stack said. “As we indicated at the outset, this is a high risk investment that was structured to provide us with meaningful upside and capped downside. We have no further funding obligations to JJB at this time and will continue to monitor the situation.

On its home turf, Dick’s is performing quite well and moving forward with its expansion strategy. The company opened four new Dick’s locations during the quarter and halfway through its fiscal year now operates 490 Dick’s Sporting Goods stores in 44 states and 81 Golf Galaxy stores in 30 states. New stores expansion is poised to accelerate during the third quarter with Dick’s vowing to open 21 Dicks’ stores and relocate three others on its way toward completing an ambitious full year growth plan to add 38 new Dick’s stores, relocate five others and relocated one Golf Galaxy store.
Dick’s ended the second quarter with $350 million in cash and cash equivalents, compared to $626 million the prior year, but did not have any outstanding borrowings under its $500 million revolving credit facility. The decline in the cash balance is due to actions over the past 12 months to repurchase shares, initiate a dividend, purchase its store support center, build a distribution centers, invest in JJB Sports and acquire intellectual property rights to the Top-Flite brand.

As part of its strategy to increase sales of proprietary brands, Dick’s recently agreed to spend $25 million to purchase rights to the Field & Stream brand for use in the hunting, fishing, camping and paddle categories.