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

• Dick's Sporting Goods reported a profit drop and cut its earnings outlook for the year after seeing an uptick in retail theft and slow sales in its outdoor category.
• It's the first reference the athletic goods retailer has made to shrink in a press release in nearly 20 years.
• In a rare miss, Dick's also fell short of Wall Street's estimates on both the top and bottom lines.

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

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

Here's how the company did in its second fiscal quarter compared with what Wall Street 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 expected

The company's reported net income for the three-month period that ended July 29 was $244 million, or $2.82 per share, 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 company lowered its profit forecast for the year in part because it expects shrink, a retail industry term that refers to inventory lost by theft or internal issues, to get worse before it gets better. 

"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 Q2 results and our go forward expectations for the balance of the year," CEO Lauren Hobart said on a call with analysts. "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." 

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

Signage outside a Dick's Sporting Goods store in Clarksville, Indiana, Nov. 9, 2020.

Luke Sharrett | Bloomberg | Getty Images

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

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

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

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

"The biggest impact in terms of the surprise for Q2 primarily came from shrink," said Gupta. "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 Q2 results as well."

Gupta noted the company typically does a physical inventory count once a year, right before the back to school season, which is when it noticed the elevated shrink levels. Because Dick's did a physical 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 shrink was theft versus other factors, including damage and vendor fraud, and said only that theft drove the losses. Given the increased risk of shrink, Dick's is considering revisiting how it does inventory counts so it can keep closer tabs on the issue, Gupta said.

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

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

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

Holding on to pandemic gains

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

Same-store sales were up 1.8% in the quarter, compared with down 5.1% in the year-ago period, and were driven by a 2.8% uptick in transactions. Analysts had been expecting 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 global workforce on Monday, primarily at its customer support center. The cuts largely impacted headquarter roles and account for less than 10% of corporate positions, Stack said. 

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

Stack cautioned that the cuts were not a cost-saving strategy 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," said Stack. "So this was not a cost-cutting move."

— CNBC's Courtney Reagan contributed to this report