Dick’s Sporting Goods Earnings Drop 23 Percent Amid Surge in Retail Theft

Dick's Sporting Goods store in Arlington Heights, Ill., on Feb. 28, 2018. Nam Y. Huh/AP Photo

Dick’s Sporting Goods saw earnings plummet 23 percent in the second quarter due to a surge in organized retail theft and an attempt to sell off excess inventory.

The company slashed its earnings guidance for the year, warning that retail theft was hurting its business and would lead to lower annual profits.

The athletic goods retailer’s second-quarter earnings report, published on Aug. 22, failed to meet Wall Street investor expectations, causing shares to plummet 24 percent and wiping out its 22 percent year-to-date gains.

This was the first time that Dick’s has reported losses to shrink in a press release in nearly 20 years.

Dick’s Sees Lower Results in Second Quarter

The company’s reported net income for the second quarter ended July 29, was $244 million, or $2.82 per share, compared with $318.5 million, or $3.25 per share, a year earlier.

Earnings per share were $2.82 versus the $3.81 expected, according to analysts surveyed by Refinitiv.

Revenue was also at $3.22 billion rather than the $3.24 billion predicted by earlier estimates, but sales did rise to $3.22 billion from $3.11 billion a year earlier.

The company saw 1.8 percent growth in second-quarter comparable-store sales, driven by a 2.8 percent increase in transactions and continued market share gains.

“While we posted another double-digit EBT [earnings before taxes] margin, our [second-quarter] profitability was short of our expectations due in large part to the impact of elevated inventory shrink, an increasingly serious issue impacting many retailers,” Dick’s CEO  and president, Lauren Hobart, said in a statement.

Citing positive sales in July, she said. “despite moderating our 2023 EPS [earnings per share] outlook, the enthusiasm we have for our business and the confidence we have in our long-term growth opportunities have never been stronger.”

Massive Losses From Theft Behind Lower Earnings

Meanwhile, the company blamed much of the poor earnings growth last quarter on shrink, which are losses due to theft, fraud, and damaged inventory.

Retail chains nationwide have been warning investors about growing theft throughout the United States over the past three years.

“Retailers across the board have seen a 26.5 percent increase in large-scale theft over the previous year. Target alone will lose half a billion dollars due to theft,” wrote political commentator Charlie Kirk in a post on social media.

“This is a national embarrassment and an absolute indictment of Democrats’ ’soft on crime' policies.”

Dick’s is the first among the major national retailers to primarily blame its poor financial reports on theft.

Retailers nationwide are struggling to contain an escalation in petty shoplifting to organized sprees of large-scale theft that have cleared out entire shelves full of merchandise.

Target warned back in May that it was preparing to lose half a billion dollars due to rising theft in its stores nationwide.

“Organized retail crime and theft in general is an increasingly serious issue impacting many retailers. Based on the results from our most recent physical inventory cycle, the impact of theft on our shrink was meaningful to both our second-quarter results and our go-forward expectations for the balance of the year,” Ms. Hobart said.

“Beyond shrink, we also took decisive action on excess product, particularly in the outdoor category, to allow us to bring in new receipts and ensure our inventory remains vibrant and well positioned,” she added.

Mr. Gupta noted that a physical inventory count was conducted annually by the company right before the school season, which led to the discovery of the elevated shrink levels.

The physical count allowed Dick’s to accurately quantify just how much of an impact the shrink had.

“The biggest impact in terms of the surprise for the second quarter primarily came from shrink,” the CFO told analysts.

“We thought 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 impacted our second-quarter results as well,” he added.

Shrink hurt Dick’s total gross margins from the period from the end of March through July by about 0.85 percentage points.

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

Due to the increased risk of shrink, he said that the company is considering revisiting how it records inventory so it can keep a closer count on the issue.

Company Also Faces Losses From Excess Inventory

However, more losses came from the moves it took to clear out excess store inventories than increased thefts.

Aggressive markdowns have been instituted to clear out overstocked outdoor products, which has added to the diminished profit forecast, while expecting more inventory losses to shrink, according to the report.

The markdown had cut into its gross margin in the second quarter by about 1.7 percent, said Chief Financial Officer Navdeep Gupta on a call with analysts.

Overall, inventories fell about 5 percent in the quarter compared with the year-ago period.

Its previously issued earnings guidance, which ran between $12.90–13.80 a share, was amended to an expected $11.33–12.13 per share for the rest of the year, according to the report.

Still, despite the profit losses in the last quarter, Dick’s is anticipating an increase in gross margins for 2023 when compared to 2022.

The retailer now expects its earning per share for the year to come in 12 percent below its initial forecast, but has reaffirmed its full-year store sales forecast for 2023 in the range of flat to positive 2 percent.

Sporting Goods Retailer Remains Upbeat Amid Recent Staff Cutbacks

Despite the losses, Dick’s executive chairman, Ed Stack, tried to put a good face on the latest results.

“We are extremely excited about the future of our business. Our newest DICK‘S concepts, DICK’S House of Sport and our next generation 50,000-square foot DICK'S store, are yielding powerful results. We haven’t seen growth opportunities like these since we went public in the early 2000s,” Mr. Stack said in a press release.

The retailer will also streamline its business optimization, and reinvest in different parts of the business, by announcing cuts in less than 1 percent of its global workforce, primarily in customer support.

The cuts primarily impacted office roles and accounted for less than 10 percent of corporate positions, Mr. Stack told shareholders.

The cutbacks are expected to save the company about $20 million in severance expenses in the next quarter and may lead to additional one-time charges of $25–50 million.

Mr. Stack said that the cuts were not a cost-saving measure but rather an attempt to reallocate resources.

“We are going to reinvest all of these dollars back into talent and the technology that we want,” he said, explaining that it "was not a cost-cutting move.”