Dick’s Sporting Goods Inc. (NYSE:DKS) reported quarterly earnings on Tuesday, and, despite beating analysts’ estimates on the top line and matching expectations on the bottom line, DKS stock fell 4% during the day.
Declining quarterly sales at the company’s Golf Galaxy chain were the primary culprit.
For the first quarter, DKS reported revenue of $1.57 billion and earnings per share came in at 53 cents. EPS matched Wall Street estimates, and revenue beat by a slight margin.
On the shareholder return front, DKS repurchased $150 million worth of its own stock during the quarter, and board of directors approved a 13 cents dividend.
Moving forward, management believes its full-year 2015 earnings will come in around $3.12 to $3.20 per share, a slightly more optimistic outlook compared to previously estimates of $3.10 to $3.20.
The Real Trouble With DKS: Golf
Same-store sales at Dick’s Sporting Goods’ flagship stores increased by 1.8% during the quarter. However, any enthusiasm about that slight increase was more than offset by the Golf Galaxy brand, which experienced an 11% decrease in same-store sales.
This isn’t the first time we’ve seen Golf Galaxy struggle.
| Q4 2014 | Q3 2014 | Q2 2014 | Q1 2014 | Q4 2013 | Q3 2013 | Q2 2013 | Q1 2013 | |
| Sales | -7.1% | -8.9% | -9.3% | -10.4% | -9.4% | -4.7% | -7.2% | -7.4% |
All information from Dick’s Sporting Goods Investor Relation Press Releases
As you can see from the table, Tuesday’s results represented the ninth consecutive quarter that same-store sales declined at Golf Galaxy. DKS purchased Golf Galaxy in 2006 for $225 million, at a time when more than 30 million Americans were playing golf. Today, it is estimated that just 25 million Americans play the game at least once a year, leading to a steady decline in the number of golf courses across the U.S.
While we could ponder why golf has fallen in popularity, the bottom line is that the game is no longer growing, and DKS bought into it at what now appears to have been the peak.
Other players in the golf industry have also struggled over the past few years as shares of Callaway Golf (NYSE:ELY) are up a measly 23% over five years while the S&P 500 is up nearly 120%. Adidas AG’s division, TaylorMade-Adidas Golf, one of the world’s biggest golf club and clothing manufacturers saw sales fall 28% in 2014.
Mark King, the President of Adidas North America and former President of TaylorMade has publicly stated, “I don’t like where the game looks like it’s going.”
With Golf Galaxy sales falling through the floor and Dick’s Sporting Goods sales shuffling along, the question investors need to be asking is, “Where is the growth going to come from?”
Aside from new Dick’s Sporting Goods locations, there probably won’t be much growth. In fact, depending on how badly golf plunges, we could see DKS take some serious write-downs with Golf Galaxy. There are 78 Golf Galaxy locations and just over 600 Dick’s Sporting Goods locations, so while a Golf Galaxy debacle will not completely bring DKS down, it could seriously hurt the overall business for years to come.
Investors should keep an eye on DKS stock, but sit this round out.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.
