Analysis: Dick’s likely to face increased competition post-pandemic

With most of its stores closed at some point during the first quarter, Dick’s Sporting Goods' net sales plummeted by 30.6%. This attrition helped operating income to slump by 335%, plunging Dick’s into the red by $186 million. As bad as these number seem they are not, in our view, too terrible. 

Indeed, in some ways they show that Dick’s has weathered the storm fairly well and should be able to emerge in a reasonably strong position. This is more so as liquidity remains good, even if revolving credit borrowings have increased by over $1 billion.
 
Overall, the coronavirus disrupted demand and the need for products related to team sports and activities dropped sharply. Impulse purchases of sports fashion were also affected as consumers were unable to browse in stores and some felt unwilling to spend on discretionary products. 

However, the disruption also created opportunities. In the market overall, demand for athleisure apparel, exercise equipment such as free weights, outdoor gear, and bikes and biking accessories all spiked sharply as gyms closed and people turned to keeping fit and healthy at home.
 
As a visible player in the market, Dick’s was one of the retailers that consumers turned to, using the website and functions like curbside collection to meet their needs. From the day the company closed most of its stores to the end of the quarter, online sales jumped by a whopping 210% over the prior year. In the quarter as a whole, which includes the more normalized trading at the start of the period, online sales rose by 110%. Overall, online penetration rose from 13% of sales in 2019 to 39% of sales. The investments Dick’s has made in its e-commerce operation over the past few years paid off as did the quick pivot to curbside services, which allowed the company to use inventory from stores to meet elevated demand.
 
While online paid dividends for Dick’s, the spoils from consumers’ buying spree of certain categories were shared more widely with other retailers. Target and Walmart, for example, did a roaring trade in fitness products and bikes, both benefitting from being open throughout the lockdown period and being able to service demand immediately. Kohl’s also performed well in athletic apparel with its own curbside collection services proving popular. Meanwhile, specialists like Lululemon and Peloton performed strongly online and both secured new customers over the quarter.
 
None of this takes away from Dick’s achievement online, but it does underline the fact that the sports specialist has plenty of competition from both generalists and deep specialists that focus on a particular area of fitness. This is a point we have made many times before and it is an important one as it means Dick’s increasingly walks a tightrope between being all things to all people and trying to deepen its expertise in particular areas of the sporting goods market – including in fast-growing activities such as yoga where it is currently very weak. This ongoing issue is one the company will need to grapple with as the retail economy starts to recover.
 
The good news is that in the wake of the pandemic, a lot of consumers are more conscious about health and wellness. This will bring a dividend to all players involved in the segment, including Dick’s. However, the company will need to work hard to differentiate itself and reconnect with many occasional customers who have drifted off to other retailers. We also believe that more generalists will look to sports and active products as a way to boost their own sales, which means the segment may be more crowded coming out of this crisis than it was going into it.