Dick’s Sporting Goods has a Foot Locker Problem

**Tyler Crowe** (0:02)
Dick's Sporting Goods Stock Has a Case of Athlete's Foot. Motley Fool Hidden Gems Investing starts now.
Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by long-time pool contributors, Rachel Warren and Matt Frankel. Guys, the earnings season has been winding down a little bit.
Looking for stories earlier today, the news was looking a little thin, and then Dick's Sporting Goods reported earnings, and based on the stock reaction, we had to talk about it. Shares of Dick's Sporting Goods stock is down about 27 percent, as we're taping right now, after the company reported earnings and updated guidance. Now, like most investors, I would assume this means the news was bad, but we've seen a lot of companies post decent results this quarter, only see their shares take it on the chin in the ensuing market reaction. So Rachel, is that the case here? Give us a road down to what happened and what were your guys' thoughts and reactions to what Dick's Sporting Goods had to say here.

**Rachel Warren** (1:03)
Yeah, I mean, there was actually some concerning numbers that came in. And it's interesting to chat about, we don't spend a ton of time focusing on retail here on this show. So Dick's actually missed on both the top and bottom lines for the quarter. They had adjusted earnings per share come in at $3.53. Wall Street was looking for $3.76.
Revenue dragged a bit, just under $6 billion. Wall Street was looking for a little bit more than that. So a lot of this is going back to the Foot Locker business, which Dick's Sporting Goods acquired last year. That's the primary culprit behind this drag. And it's interesting because you have the core Dick's namesake stores. They posted a roughly 5% comparable sales increase. Foot Locker stores actually saw comps slide 3.6%.
And you had management saying that they had fewer high-profile shoe launches. It's an increasingly competitive, discounted market. That's actually forcing them to cut prices to protect their market share. But the other thing that's interesting here is this is also tied to the broader, what's called the Nike ripple effect. So we saw management essentially call out a lack of high-profile sneaker launches. They're pointing upstream to major partners who are stuck in a creative lull, if you will. And you know, you got to bear in mind, Foot Locker has historically relied on these legacy silhouettes, retro launches. And so Dix is really feeling the pain first when consumer hype slows down. Another key number, total inventory surged 63% year over year. Now obviously, they're still absorbing the Foot Locker acquisition, but they're carrying a lot of inventory, probably looking for a lot of clearance sales and promotions, which great for consumers, not great for the business, not great for investors. And to top it all off, Foot Locker has slashed its full year earnings guidance considerably. So really not a great readout for this business.

**Matt Frankel** (2:54)
Yeah, I mean, the numbers weren't great, but I mean, you're right. To me, the sharp decline, it's almost as much as what management said, and not just the numbers. I mean, the CEO called out the quote, increasingly promotional athletic footwear and apparel market, said the conditions deteriorated as the quarter progressed, which is something you really don't like hearing from management. Also said Foot Locker has a lot of exposure directly to the categories, getting discounted the most. So just a couple of things to point out here. So I mean, Dick's stock was down 10% year to date going into this. So now it's really underperforming. It's clearly a cyclical problem in the footwear space. I mean, if you look at Nike, Under Armour, even Academy Sports, which is I would call their closest direct comparison, and ON Holdings, they're all underperforming too. You know, Dick's has a large buyback authorization, is one of the key things I read in the earnings report, $3 billion.
I'm curious to see if they accelerate their repurchases to kind of send the market a signal here.

**Tyler Crowe** (3:55)
You know, one of my favorite things in like these conference calls every once in a while is the management word salad that we get of trying to explain why all this happened. One of the best ones I think I saw in this conference call was they mentioned geopolitical troubles, which apparently is affecting shoe sales. Look, some things are believable, but I don't know if closure of the Strait of Hormuz is exactly affecting how many people are buying Nikes before and after the World Cup here. So maybe, but we'll see. The thing that really pointed it stuck out to me, and Rachel, you mentioned it here too, was Foot Locker specifically. This was an acquisition that Diks kind of took, I don't want to say took a flyer on, that would be a little too flippant, but this was slightly different than what they have normally been doing. Like you said, it's a little bit more fashion trend, you know, very dependent on releases of signature shoes and stuff like that. And it's still, I would call it like indigestion of the acquisition.