Dick's Sporting Goods, other retailers crack code of driving up profits

• Dick's Sporting Goods reported higher profits in the second quarter, as the company's sales grew and it had fewer markdowns.
• The company's CEO echoed a theme of many retailers this quarter: Widening margins, as consumers go on a spending spree and companies learn how to operate a more efficient e-commerce business.
• Analysts are asking whether the wider margins can last, even as the level of government stimulus tapers off.

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Dick's Sporting Goods CEO Lauren Hobart said Wednesday that the company is not only selling more golf clubs and activewear — it has found a formula for driving up profits, even as shoppers buy more online.

Hobart's comments tapped a theme that has come up frequently in recent retail earnings calls: Widening margins.

Consumers have been on a spending spree. That has helped. But another gamechanger is that retailers have learned to make e-commerce more profitable, from shipping online orders from stores to steering shoppers toward curbside pickup.

"In a way it's simple: It's ship from store," said Michael Baker, a senior retail analyst for D.A. Davidson. "And if the customer is coming to the store to pick it up, that evens it out right there."

He said companies have fundamentally changed their online businesses as they move 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 tendency that he doesn't expect to change soon.

That has caught investors' attention. Dick's shares touched an all-time high of $134.80 on Wednesday after it became the latest retailer to beat second-quarter earnings expectations and raise its forecast. Its quarterly sales shot up by 21% compared with the year-ago period, and its profits jumped by nearly 80%.

Dick's Chief Financial Officer Lee Belitsky said profits from online sales are now in line with typical store sales, thanks in part to more customers retrieving their own online purchases at the store or in the parking lot.

Numerous retailers, including Dick's, Target and Best Buy have defrayed the cost of e-commerce orders, too. They also have turned stores into mini warehouses and touted parking lot pickup as a faster option — making more money as they save shipping costs.

Target, which began the strategy prior to the pandemic, fulfilled more than 95% of second-quarter sales in its stores. Best Buy said about 60% of online orders, based on revenue, were fulfilled by stores in the second quarter — and 42% were picked up by customers at its stores.

Dick's stores fulfilled more than 70% of online sales in the second quarter, Hobart said. Plus, she said customers who use the service tend to buy more.

Investors have been monitoring another dynamic that's helped margins: The level of promotions.

Customers have paid less attention to price as they clear shelves and add items into virtual shopping carts. The Urban Outfitters and Anthropologie brands saw "record low second-quarter merchandise markdown rates," said Frank Conforti, co-president and chief operating officer of Urban Outfitters.

Best Buy also said less merchandise is ending up on clearance racks, too.

Best Buy Chief Financial Officer Matt Bilunas acknowledged on Tuesday's earnings call that some of that may fade. He said the consumer electronics retailer will soon lap periods of very low promotional activity. Yet he said he expects the company to have fewer holiday promotions than two years ago, even if they are elevated compared with last year.

On an earnings call Wednesday, Hobart said Dick's has grown more sophisticated about promotions. She said it has phased out circulars, which required the company to guess in advance about what it should put on sale. Now, she said, it can monitor trends and adapt more nimbly with the help of data science — cutting or raising prices in almost real time. It has more exclusive merchandise, such as its new men's athleisure line, to avoid competing only on price.

She said she believes higher profits can continue, even as the level of government stimulus tapers off.

Michael Lasser, a retail analyst for UBS, said retailers have levers they can pull to keep margins higher. He pointed to Dick's cutting back on weekly circulars and Best Buy cross-training workers for different roles, so it can potentially reduce labor hours.

Still, he said, consumer spending will change when people return to offices, business trips and more social events. Supply chain challenges will gradually abate. People will no longer be the same captive audience of shoppers: Buying new couches, second computer monitors and more.

That, he said, will force retailers to dangle more deals and ramp up marketing again.

"As sales slow, promotions will increase and that's going to put some pressure on margins," he said

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