Dick’s Sporting Goods, other retailers crack code to boost profits
Dick’s Sporting Goods CEO Lauren Hobart said on Wednesday the company is not only selling more golf clubs and sportswear, it has found a formula to increase profits even as shoppers are buying more online.
Hobart’s comments touched on a theme that has come up frequently in recent retail earnings calls: widening margins.
Consumers have been on a spending spree. It helped. But another deciding factor is that retailers have learned how to make e-commerce more profitable, from shipping online orders from stores to directing shoppers to curbside pickup.
“In a way, it’s simple: it’s shipped from the store,” said Michael Baker, senior retail analyst for DA Davidson. “And if the customer comes to the store to pick it up, that equates him there.”
He said companies had fundamentally changed their online businesses by moving more inventory out of distribution centers and closer to customers’ homes. Plus, he said, customers have shown they are willing to pay higher prices – a trend he doesn’t expect to change anytime soon.
This caught the attention of investors. Dick’s shares hit an all-time high of $ 134.80 on Wednesday after he became the last retailer to beat second-quarter earnings expectations and raise his forecast. Its quarterly sales jumped 21% from the same period a year earlier and its profits jumped nearly 80%.
Dick’s chief financial officer Lee Belitsky said profits from online sales are now in line with typical store sales, in part thanks to more customers picking up their own online purchases in the store or in the parking lot.
Many retailers, including Dick’s, Target, and Best Buy, have also covered the cost of online orders. They’ve also turned stores into mini-warehouses and introduced parking lot pickup as a faster option, saving them more money while saving on shipping costs.
Target, which launched the strategy before the pandemic, achieved more than 95% of second-quarter sales in its stores. Best Buy said about 60% of online orders, based on revenue, were filled by stores in the second quarter – and 42% were picked up by customers in its stores.
Dick’s stores made more than 70% of online sales in the second quarter, Hobart said. Additionally, she said that customers who use the service tend to buy more.
Investors are watching another dynamic that has helped margins: the level of promotions.
Customers paid less attention to price when clearing shelves and adding items to virtual shopping carts. The Urban Outfitters and Anthropologie brands had “record second quarter merchandise shrinkage rates,” said Frank Conforti, co-president and chief operating officer of Urban Outfitters.
Best Buy also said less merchandise also ends up on clearance racks.
Best Buy CFO Matt Bilunas conceded during Tuesday’s earnings call that part may fade. He said the consumer electronics retailer will soon experience periods of very low promotional activity. Still, he said he expects the company to have fewer holiday promotions than two years ago, even though they are higher than last year.
In an earnings call on Wednesday, Hobart said Dick’s has become more sophisticated when it comes to promotions. She said she was phasing out flyers, forcing the company to guess in advance what it should put up for sale. Now, she said, it can monitor trends and adapt more nimbly using data science – reducing or increasing prices almost in real time. It offers more exclusive products, like its new line of sports for men, to avoid competing only on price.
She said she believed higher profits could continue even if the level of government stimulus waned.
Michael Lasser, retail analyst for UBS, said retailers have levers they can pull to maintain higher margins. He pointed to Dick’s reduction in weekly flyers and cross-training of Best Buy workers for different roles, which can potentially reduce work hours.
Yet, he said, consumer spending will change when people return to the office, on business trips and at more social events. The challenges in the supply chain will gradually diminish. People will no longer be the same captive buying audience: buying new sofas, second computer monitors and more.
This, he said, will force retailers to close more deals and relaunch marketing.
“As sales slow down, promotions will increase and that will put some pressure on margins,” he said.